Stanislaw Gomulka and John Lane

Published 1993

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The paper develops and discusses a two-sector general equilibrium growth model of a 'transit economy' which is subjected to an external price shock. The assumed behavioural charactertistic of such an economy is the presence of a distributional rigidity rather than the more commonly assumed nominal or real wage rate rigidity. The production structure is of the Leontief type. It is shown that the response to an adverse price shock for an imported commodity is a recession. The paper provides a theoretical insight into the recession's causes and analytical expressions for its size. It also provides a analysis of post-shock growth contingent on alternative wage shares and the possible trade-offs between short and long-run unemployment rates.