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Transition and the Output Fall

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  • Gerard Roland
  • Thierry Verdier

Abstract

We present a model to explain why in transition economies of Central and Eastern Europe an important output fall has been associated to price liberalization. Its key ingredients are search frictions and Williamsonian relation-specific investment implying that new investments are made only after having found a new long ten-n partner. When all firms search for new partners, output may fall because of three effects: a) disruption of previous production links, b) a fall in investment, C) capital depreciation due to the absence of replacement investment. We show that forms of gradual liberalization like the Chinese "dual-track" price liberalization may avoid or reduce the transitory output fall.

Suggested Citation

  • Gerard Roland & Thierry Verdier, 1997. "Transition and the Output Fall," William Davidson Institute Working Papers Series 37, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1997-37
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • P41 - Economic Systems - - Other Economic Systems - - - Planning, Coordination, and Reform
    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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