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The Path of Output from Plan to Market

  • Gylfason, Thorvaldur

    (Department of Economics, University of Iceland)

This paper is intended to clarify the contribution of macroeconomic stabilization and structural adjustment to the transformation from plan to market in Central and Eastern Europe and elsewhere. Four main points emerge. First, increased price stability improves the utilization of capital and thus increases the level of output at full employment in the long run, even though output decreases initially. Second, the static output gain from stabilization is captured in a simple formula in which the gain is approximately proportional to the square of the orginal inflation distortion. Third, successful stabilization increases the rate of growth of output per head, and not only its level, in the presence of constant returns to capital in a broad sense. Fourth, substitution of plausible parameter estimates into the simple formulae reflecting the gains from stabilization indicate that the static and dynamic output gains can be substantial.

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File URL: http://www.ihs.ac.at/publications/eco/east/ro-19.pdf
File Function: First version, 1995
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Paper provided by Institute for Advanced Studies in its series East European Series with number 19.

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Length: 23 pages
Date of creation: Feb 1995
Date of revision:
Handle: RePEc:ihs:ihsrop:19
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