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A simple model of the transformational recession under a limited mobility constraint

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This paper considers the impact on sectoral outputs and employments of rapid and large changes in relative prices, such as those which occurred in transition economies during the 1990s. A simple general equilibrium model is developed in which price changes are induced by a tax reform and resource mobility is restricted. The reform is designed to improve the quality of the price system, but is shown to cause a recession the size of which is proportional to the initial tax distortion. It is also demonstrated that a wage flexibility would moderate the magnitude of the recession, but this gain would be obtained at a cost in longer term efficiency, and would be, in any case, unsustainable.

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en

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application/pdf

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http://eprints.lse.ac.uk/20171/1/A_Simple_Model_of_the_Transformational_Recession_Under_a_Limited_Mobility_Constraint.pdf

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