Transition Economy Readjustment: A Trade-Shock Perspective
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Date
2022
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Publisher
Vanderbilt University
Abstract
To what extent is Hungary’s recession between 1991 and 1996 driven by the costs of
institutional adjustment following the collapse of the planned economy? Using a dynamic general
equilibrium model with trade policy, price subsidies, and labor frictions, I build on prior work by
Gorodnichenko, Mendoza, and Tesar (2012) to argue that the collapse of Soviet trade in 1991
induces a costly restructuring of Hungary’s planned economy. I show that the estimated model
closely matches the trajectory of consumption as seen in the data. Counterfactual experiments
indicate that high wage rigidity, habit formation in consumption, and large oil price subsidies,
together, go a long way in explaining the severity of Hungary’s recession. The model highlights
alternative policies resulting in a shortened and lessened severity.
Description
Economics Department Honors Thesis.
Keywords
Research Subject Categories::SOCIAL SCIENCES, Economics