The Path of Output From Plan to Market

IMF Working Papers, June 1, 1994

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This paper clarifies the contribution of macroeconomic stabilization and structural adjustment to the transformation from plan to market in Central and Eastern Europe and elsewhere.
Four main points emerge from the analysis.

First: Increased price stability improves the utilization of capital and thus increases the level of output at full employment in the long run, even though output decreases initially.
Second: The static output gain from stabilization is captured in a simple formula in which the gain is approximately proportional to the square of the original inflation distortion.
Third: Successful stabilization increases the rate of growth of output per head, and not only its level, in the presence of constant returns to capital in a broad sense.
Fourth: Substitution of plausible parameter estimates into the simple formulae reflecting the gains from stabilization indicate that the static and dynamic output gains can be quite large.

Focus on how price stabilization affects capital utilization and long-run output at full employment.
Derivation and use of a simple formula linking static output gains to the square of the original inflation distortion.
Role of constant returns to capital (in a broad sense) in translating stabilization into higher growth rates of output per head.
Quantitative assessment via substitution of plausible parameter estimates to evaluate static and dynamic gains.

Subjects: Consumption, Depreciation, Fiscal policy, Fiscal stabilization, Inflation, National accounts, Price stabilization, Prices
Keywords: aggregate output, Central and Eastern Europe, Consumption, Depreciation, economic growth, Fiscal stabilization, Inflation, inflation distortion, M/Y decrease, output gain, output ratio, Price stabilization, production function, ratio rise, saving rate, structural adjustment, WP