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Output and Unemployment Dynamics in Transition

  • Vivek H. Dehejia
  • Douglas W. Dwyer

In this paper, we present a simple but rigorous model of the dynamics of output and Unemployment in transition. We consider a worker-entrepreneur, who is 'locked in' to her current production technique, with a choice of continuing to work with it or search for a better technique. If she succeeds she jumps to the "cutting edge" frontier; if not she becomes unemployed and searches in the next period. We model a movement to a market economy as a discontinuous jump in the technological frontier and analyze the transitional dynamics. We are able to contrast the difference between a fully anticipated versus an unanticipated policy shock. After an unanticipated shock, output falls immediately and unemployment spikes, as agents search for better techniques. Output is higher in the new steady state, but is approached by dampening oscillations. The results become more interesting when the reform is fully anticipated Unemployment falls and output stagnates in anticipation of the reform. Suprisingly, output exhibits cycles before and after the reform. Therefore, announcing a reform in advance may have unintended negative consequences.

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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp178.pdf
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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 178.

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Length: pages
Date of creation: 01 Jan 1998
Date of revision:
Handle: RePEc:wdi:papers:1998-178
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  1. Vivek H. Dehejia, 1997. "Optimal Restructuring Under a Political Constraint: A General Equilibrium Approach," William Davidson Institute Working Papers Series 35, William Davidson Institute at the University of Michigan.
  2. King, R.G. & Rebelo, S.T., 1989. "Transitional Dynamics And Economic Growth In The Neoclassical Model," RCER Working Papers 206, University of Rochester - Center for Economic Research (RCER).
  3. Mariano Tommasi, 1995. "Where are we in the Political Economy of Reform?," UCLA Economics Working Papers 733, UCLA Department of Economics.
  4. Castanheira, Micael & Roland, Gérard, 1996. "The Optimal Speed of Transition: A General Equilibrium Analysis," CEPR Discussion Papers 1442, C.E.P.R. Discussion Papers.
  5. Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 298-321, April.
  6. Vivek Dehejia & Douglas Dwyer, 2004. "Output and unemployment dynamics in transition," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 7(2), pages 69-81.
  7. Joao Gomes & Jeremy Greenwood & Sergio Rebelo, 1997. "Equilibrium Unemployment," NBER Working Papers 5922, National Bureau of Economic Research, Inc.
  8. Boucekkine, Raouf & Germain, Marc & Licandro, Omar, 1997. "Replacement Echoes in the Vintage Capital Growth Model," Journal of Economic Theory, Elsevier, vol. 74(2), pages 333-348, June.
  9. Raouf Boucekkine & Omar Licandro & Christopher Paul, . "Differential-Difference Equations in Economics: On the Numerical Solution of Vintage Capital Growth Models," Computing in Economics and Finance 1996 _036, Society for Computational Economics.
  10. Andrew Atkeson & Patrick J. Kehoe, 1995. "Social insurance and transition," Staff Report 202, Federal Reserve Bank of Minneapolis.
  11. Blanchard, Olivier & Kremer, Michael, 1997. "Disorganization," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1091-1126, November.
  12. Aghion, P. & Blanchard, O.J., 1993. "On the Speed of Transition in Central Europe," Working papers 93-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc.
  14. Andrew Atkeson & Patrick Kehoe, 1997. "Industry Evolution and Transition: A Neoclassical Benchmark," NBER Working Papers 6005, National Bureau of Economic Research, Inc.
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