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Strain and the Inflation - Unemployment Relationship: A Conceptual and Empirical Investigation

  • Daniel Daianu
  • Lucian-Liviu Albu

Economic theory tells that a command system allocates resources poorly because of the impossibility of economic calculation. Therefore, once prices are freed and start to operate at quasi-equilibrium (market-clearing) levels, the hidden inefficiencies come into the open and a massive resource reallocation would have to take place. More precisely, the issue refers to the possible and probable intensity of resource reallocation in view of constraints like the balance between exit and entry in the labour market, the size of the budget deficit and the means for its non-inflationary financing, social and political stability, etc. This paper makes an attempt to conceptualise the emergence of strain emerges an economic system when relative prices change dramatically, and explores what can be implications for stabilisation policy. The start is made with the closed economy, after which the open economy case is looked at, and a possible formalised expression of strain is suggested, The distributional struggle, as a consequence of resource reallocation, is highlighted. Some modelling and empirical analysis help in substantiating the main thesis. it is contented that the line of reasoning espoused herein can help in developing an economic explanation of shocks in economic systems.

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Paper provided by Department of Economics, University of Leicester in its series Ace Project Memoranda with number 96/15.

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Handle: RePEc:wuk:leiapm:96/15
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  1. Eric V. Clifton & Mohsin S. Khan, 1993. "Interenterprise Arrears in Transforming Economies: The Case of Romania," IMF Staff Papers, Palgrave Macmillan, vol. 40(3), pages 680-696, September.
  2. Daniel Daianu, 1994. "Inter-Enterprise Arrears in a Post-Command Economy: Thoughts From a Romanian Perspective," IMF Working Papers 94/54, International Monetary Fund.
  3. Portes, Richard, 1986. "The Theory and Measurement of Macroeconomic Disequilibrium in Centrally Planned Economies," CEPR Discussion Papers 91, C.E.P.R. Discussion Papers.
  4. Grandmont, Jean-Michel, 2008. "Nonlinear difference equations, bifurcations and chaos: An introduction," Research in Economics, Elsevier, vol. 62(3), pages 122-177, September.
  5. Guillermo A. Calvo & Fabrizio Coricelli, 1993. "Output Collapse in Eastern Europe: The Role of Credit," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 32-52, March.
  6. Albu, Lucian-Liviu & Ivan-Ungureanu, Clementina, 1994. "Coût ou bénéfice de la transition
    [Cost or benefit of the transition]
    ," MPRA Paper 14118, University Library of Munich, Germany.
  7. Sachs, J.D. & Woo, W.T., 1994. "Structural Factors in the Economic Reforms of China, Eastern Europe and the Former Soviet Union," Papers 94-01, California Davis - Institute of Governmental Affairs.
  8. Vito Tanzi, 1993. "Fiscal Policy and the Economic Restructuring of Economies in Transition," IMF Working Papers 93/22, International Monetary Fund.
  9. Ickes, B.W. & Ryterman, R., 1992. "Inter-Enterprise Arrears and Financial Underdevelopment in Russia," Papers 9-92-6, Pennsylvania State - Department of Economics.
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