The speed of transition revisited
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Date
2017
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Abstract
The speed of transition literature appears to have overlooked the fact that due to the
dynamic nature of the economy the post-transition economic performance influences optimal
behavior already during transition. We illustrate the implications of this neglect
using the well-known model of Aghion and Blanchard (1994, Section 6.4). The correct
solution differs in several respects from the "approximate" solution presented by Aghion
and Blanchard. First, unemployment is increasing up to a certain endogenous point in
time, when, second, the remaining state sector is closed down. This point in time can be
defined as the end of transition. The correct solution is based on transforming the problem
to a type of a dynamic optimization problem often encountered in resource economics: a
scrap value problem with free terminal time.
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Keywords
transition, dynamic optimization, optimal unemployment rate