Transition and the Output Fall

Posted: 20 Apr 1999

See all articles by Gérard Roland

Gérard Roland

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR)

Thierry Verdier

Paris School of Economics (PSE); Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Centre for Economic Policy Research (CEPR)

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Abstract

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, P51

Suggested Citation

Roland, Gérard and Verdier, Thierry, Transition and the Output Fall. Available at SSRN: https://ssrn.com/abstract=158089

Gérard Roland (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4321 (Phone)
510-642-6615 (Fax)

Centre for Economic Policy Research (CEPR)

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Thierry Verdier

Paris School of Economics (PSE) ( email )

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Paris, 75014
France

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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