Econometrics and the Design of Economic Reform

Michael Bruno

Econometrica, 1989, vol. 57, issue 2, 275-306

Abstract: The concept of economic reform is described as a planned shift from one Pareto inefficient, but quasi-stable, Nash equilibrium (or "trap") to a new Pareto superior equilibrium, which will also be stable. The concept is applied to recent "shock" stabilization programs, with special reference to Israel, where the economy was credibly shifted from a three-digit inflationary process, with considerable inertia, to relative price stability with higher real growth, at only moderate adjustment costs, by means of a "heterodox" plan. The idea is rationalized with a simple dual equilibrium inflation model, for which some econometric estimates are also given. Copyright 1989 by The Econometric Society.

Date: 1989
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