Transition and the Output Fall
University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR)
Paris School of Economics (PSE); Delta - Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)
Economics of Transition, Vol. 7, Issue 1, March 1999
We present a model to explain why in the transition economies of Central and Eastern Europe an important output fall has been associated with price liberalization. Its key ingredients are search frictions and Williamsonian relation-specific investment, implying that new investments are made only after having found a new long-term partner. When all firms search for new partners, output may fall because of three effects: a) disruption of previous production links, b) a fall in investment, and c) capital depreciation due to the absence of replacement investment. We show that forms of gradual liberalization like the Chinese "dual-track" price liberalization may avoid the transitory output fall.
JEL Classification: D21, D50, E30, E61, P41, P51Accepted Paper Series
Date posted: April 20, 1999
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