Output And Unemployment Dynamics In Transition

Vivek Dehejia () and Douglas Dwyer

No 2450, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 if a reform of identical magnitude had been implemented immediately. This provides, therefore, an argument in favour of immediately implementing a reform as against announcing it in advance with a delayed implementation. One could interpret this is an argument in favour of 'shock therapy' as against 'gradualism', where the latter has the specific connotation of delaying reform (rather than sequencing it slowly).

Keywords: Adjustment costs; Policy reform; Transition dynamics; Industry restructuring (search for similar items in EconPapers)
JEL-codes: O10 P10 (search for similar items in EconPapers)
Date: 2000-05
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Working Paper: Output and Unemployment Dynamics in Transition (2004)
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