A Simple Model of the Transformational Recession Under a Limited Mobility Constraint

Stanislaw Gomulka and John Lane

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper considers the impact on sectoral outputs and employments of rapid and large changes in relative prices, such as those which occurred in transition economies during the 1990s. A simple general equilibrium model is developed in which price changes are induced by a tax reform and resource mobility is restricted. The reform is designed to improve the quality of the price system, but is shown to cause a recession the size of which is proportional to the initial tax distortion. It is also demonstrated that a wage flexibility would moderate the magnitude of the recession, but this gain would be obtained at a cost in longer term efficiency, and would be, in any case, unsustainable.

Keywords: Output falls; Central Europe; Former Soviet Union; contractionary impact; relative prices; transition economies (search for similar items in EconPapers)
Date: 2000-08
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp0466

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