Transition and the output fall

Abstract

We present a model to explain why in the transition economies of Central andEastern 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, P51.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 256 citations exist upstream.