|This centre is a member of The LSE Research Laboratory [RLAB]: CASE | CEE | CEP | SERC | STICERD||Cookies?|
Paper No' CEPDP0124:
Save Reference as: BibTeX File | EndNote Import File
Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: CEP Discussion Papers
Share this page: Google Bookmarks | Facebook | Twitter
Abstract:The paper examines cases in which from a production efficiency standpoint "big bang" programs are superior to gradualist programs. Nevertheless, in the presence of (I) uncertainty about the exogenous shocks, (ii) dependence of policy actions on the state of the economy, and (iii) uncertain future of firms in the context of a generalized short-run output contraction, "big bang" programs can lead to inferior outcomes. We argue that short-term effects of a "big-bang" on output and employment may endogenously weaken the credibility of the program. This can induce perverse behaviour on the part of the economic agents, leading to outcomes that are worse than those associated with a gradual program. For example, if the government is perceived to face a political constraints that make high rates of unemployment unacceptable, then workers'' wage claims may be "too high" because of the perception of a government bailout of insolvent firms should times be tough.
Copyright © RLAB & LSE 2003 - 2014 | LSE, Houghton Street, London WC2A 2AE | Contact: RLAB | Site updated 31 August 2014