Strain and Inflation-Unemployment Relationship in Transitional Economies: A Theoretical and Empirical Investigation

Abstract:     
Standard economic theory tells that a command system, like the former eastern economies, allocates resources poorly due to the impossibility of accurate calculation. Therefore, once prices are freed and start to operate at quasi-equilibrium (market-clearing) levels, the hidden inefficiencies come into the open and a possible massive resource reallocation would have to take place. More precisely, the issue refers to the possible and probable intensity of resource reallocation in view of constraints like the balance between exit and entry in the labour market, the size of the budget deficit and the means for its non-inflationary financing, social and political stability, etc. This paper tries to conceptualise the fact that the dynamics of unemployment and inflation are correlated not in a classical sense but in a very complicated mode that suggests the occurrence of some attractors when certain slow parameters are evolving in the neighbourhood of special threshold-values. The start is made with simple models that are based on empirical data and can show to us the traces to discover the steps of transition in eastern economies on the inflation-unemployment relationship space. Then, using economic theory combined with non-linear modelling more refined information is extracted from the statistical standardised data for to evaluate other faces of the eastern transition.

Number of Pages in PDF File: 55

Keywords: natural rate of unemployment, potential function, Hurst exponent, pitchfork bifurcation, modified Phillips curve, Rössler attractor

JEL Classification: C61, C65, E24, E27, E32

working papers series