Output and Unemployment Dynamics in Transition

Vivek Dehejia () and Douglas W. Dwyer
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Douglas W. Dwyer: Moody’s Risk Management Services, http://www.moodysanalytics.com/

No 04-08, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: This paper examines transition dynamics in a search economy. We contrast two extreme cases: a completely unexpected reform and a fully anticipated reform. We view the former as a metaphor for a reform being announced and implemented with immediate effect, the latter as a metaphor for a reform being announced in advance of its implementation. In contrast to models with convex adjustment costs, we show that announcing the reform in advance leads to stagnation in anticipation of the reform and output cycles after the implementation that are more volatile than had a reform of identical magnitude been implemented immediately. However, the more volatile output trajectory of the anticipated case nonetheless yields a higher PDV of output than an unanticipated reform of equal magnitude. This suggests, therefore, that an anticipated reform is better than an unanticipated reform, even though the former induces greater volatility.

Keywords: adjustment costs; industy restructuring; transition dynamics; policy reform (search for similar items in EconPapers)
JEL-codes: O1 P1 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2004-05, Revised 2004-06
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Citations: View citations in EconPapers (2)

Published: Revised version in Journal of Policy Reform, Vol. 7, No. 2 (June 2004), pp. 69–81

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Related works:
Working Paper: Output And Unemployment Dynamics In Transition (2000)
Working Paper: Output and Unemployment Dynamics in Transition (1998)
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