Fabrizio Coricelli

Growth in Transition: What We Know, What We Don'T, and What We Should

This essay surveys macroeconomic issues that marked the transition from centrally planned to market economy in Central and Eastern European and former Soviet Union countries. We first establish a set of stylized facts of the transition so far, namely: (1) output fell, (2) capital shrank, (3) labor moved, (4) trade reoriented, (5) the structure changed, (6) institutions collapsed, and (7) transition costs. We then critically survey the theoretical literature on transition, discussing various explanations for the initial output fall as well as medium term issues, such as optimal speed of transition, disorganization, institutions and sectoral reallocation as a source of output dynamics. Last, we review the empirical literature to assess how well it translates the theoretical models and explains the stylized facts. The essay concludes with a succinct list of suggestions for future research.

Real Exchange Rate Dynamics in Transition Economies

Real exchange appreciation has been a common feature in transition economies since the launching of stabilization and reform programs at the beginning of the 1990s. Previous literature has described this phenomenon as an equilibrium adjustment that followed a sharp undervaluation at the start of the reforms. This Paper argues that real appreciation had different sources over time and across countries. Building on a simple analytical framework, the Paper disentangles these differences and stresses the role of structural reforms and factor reallocation in determining the behavior of the real exchange rate. The empirical results show that the nature of the real appreciation was significantly different in the countries of the Former Soviet Union (FSU), except for the Baltic countries, and in Central and Eastern Europe. The role of structural change and transitional reallocation of resources across sectors diminishes through time, and stabilizes around the fifth or sixth year into the transition. The dynamics of the real exchange rate in several Central-Eastern European countries (CEE) in the process of accession to the European Union, can be now assimilated to that of previously acceding countries such as Spain, Portugal, and Greece, with the Harrod-Balassa-Samuelson effect playing a dominant role at later stages of transition. The Paper concludes by discussing the implications for exchange rate policy for transition economies and potential drawbacks of the Maastricht criteria once CEEs enter the European Union.

Output Collapse in Eastern Europe; The Role of Credit

Real bank credit in Eastern European countries after their recent stabilization programs is shown to have fallen sharply, except in the case of Hungary. The meaning of the fall is discussed from the present value and liquidity perspectives. Moreover, it is shown that the hypothesis that the output contraction may partly owe to a credit contraction cannot be ruled out. The hypothesis is tested on a sample of 85 branches of industry in Poland. Also analyzed are the rationale for expecting a connection between credit and output and the policy options available to mitigate the liquidity crunch in postsocialist economies.

Monetary Institutions, Monopolistic Competition, Unionized Labor Markets and Economic Performance

Recent literature on the interactions between labor unions and monetary institutions features either a supply or a demand channel of monetary policy, but not both. This leads to two opposing views about the effects of central bank conservativeness. We evaluate the relative merits of those conflicting views by developing a unified framework. We find that: (i) the effect of conservativeness on employment depends on unions’ relative aversion to unemployment versus inflation, and (ii) for plausible values of this relative aversion (and more than one union), social welfare is maximized under a highly conservative central bank. We also evaluate the effects of centralization of wage bargaining and product market competition on unemployment and inflation.

Fiscal Constraints and the Speed of Transition

This paper develops a model of the process of reallocation of resources from a declining state sector to an expanding private sector. The transition is shown to be costly in that it entails unemployment and a deterioration of the fiscal balance. The interaction of fiscal constraints with the transition process is examined. It is shown that fiscal constraints may induce the government to maintain the state sector, slowing the speed of transition, and could jeopardize the eventual outcome of the process of restructuring.

Monetary Transmission Mechanism in Central and Eastern Europe: Gliding on a Wind of Change

This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe. In particular, while laying out the functioning of the separate channels in the MTM, it explores possible interrelations between different channels and their impact on prices and the real economy. The empirical findings for Central and Eastern Europe are then briefly compared with results for industrialized countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance, and potential development, of the different channels, emphasizing the relevant asymmetries between Central and Eastern European countries and the euro area.

Economic Restructuring, Unemployment, and Growth in a Transition Economy

This paper develops a model of the process of reallocation of labor from the state sector to the private sector. When growth is exogenously determined, we show that in the initial stages of transition unemployment will rise. After a critical stage in the transition process, restructuring is accompanied by a decline in unemployment. When growth is endogenously determined, and human capital is acquired by learning-by-doing, we show that whether or not restructuring eventually occurs is determined by the level of human capital in the private sector and the rate of unemployment. The effects of various shocks and government policies on the costs, speed, and eventual outcome of restructuring are analyzed.

Exchange Rate Policy During Transition to the European Monetary Union: The Option of Euroization

Countries of central eastern Europe which are candidates for accession to the European Union face fundamental challenges in the conduct of macroeconomic policies. These countries are characterized by growth rates faster than those of EU countries, along with large current account deficits and an equilibrium appreciation of the real exchange rate. In such a context, an early adoption of the euro may be beneficial to central eastern European countries, while the ERM-II system and the Maastricht criterion on inflation may give rise to serious drawbacks for candidate countries.

Finance and growth in economies in transition

Abstract The paper presents an analytical discussion and empirical evidence on the adjustment of financial markets to the stabilization and reforms implemented in a transition economy, emphasizing the role of liquidity constraints. Different types of equilibria, associated with different financial structures, can emerge after reforms. The paper argues that a key role during the transition is played by private, trade credit markets. The functioning of the latter requires the existence of a minimum set of market institutions, that can impose credible penalties and rewards for ‘good’ behavior.

Inter-enterprise Arrears in Economies in Transition

Most stabilization programs in previously centrally planned economies (PCPEs) have relied on a sharp tightening of credit policy. In addition to — or even more important than — the objective of curbing inflation typical of stabilization programs in market economies, the tightening of credit in PCPEs was meant to foster the restructuring of the economy, by forcing firms to adopt efficient methods of production and by filtering out of the system nonviable firms. In short, tight credit was a crucial instrument for imposing hard budget constraints. In previous works (Calvo and Coricelli, 1992,1993) we have advanced the view that in the context of underdeveloped credit markets, with segmented financial circuits of households and firms, the contraction of bank credit likely played a significant role in the output collapse which accompanied the initial stages of most stabilization programs in PCPEs. However, it is often heard that even if tight credit partly contributed to the initial output decline it was nevertheless a key instrument for inducing a more efficient allocation of resources across firms and sectors. In this paper we raise doubts on the possibility of achieving such an efficient allocation in the context of underdeveloped financial markets. We focus on inter-enterprise credit, which effectively illustrates how a liquidity squeeze might be a major obstacle for an efficient selection of bad and good firms.