A simple model of the transformational recession under a limited mobility constraint

Stanislaw Gomulka and John Lane

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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)
JEL-codes: J1 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2000-08
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:20171

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