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Mr. Jonathan David Ostry and Mr. Eduardo Borensztein

Front Matter Page Research Department Contents I. Introduction II. Developments in Poland in 1990-91 1. The first year of the program 2. The second year of the program 3. The anatomy of the recession a. Output b. Employment c. Productivity d. Real product wages III. Empirical Findings 1. Structural versus macroeconomic factors 2. Supply and demand shifts a. Price-output correlations b. A simple supply and demand model IV. Conclusions Text Tables 1. Poland: Cumulative fraction of variance explained by

Mr. Jonathan David Ostry, Mr. Eduardo Borensztein, and Mr. Dimitri G Demekas

factors across industrial sectors 2. National and industry factors 3. Comparative advantage and sectoral shifts IV. Supply versus Demand Factors in the Output Decline 1. Price-output correlations 2. A simple model of supply and demand V. Conclusion Tables 1. Bulgaria: Selected Indicators, 1988-91 2. Czech and Slovak Federal Republic: Selected Indicators, 1988-91 3. Romania: Selected Indicators, 1988-91 4. Fraction of Variability Explained by Principal Components 5. Influence of National and Structural Factors 6. Comparative Advantage

Mr. Jonathan David Ostry and Mr. Eduardo Borensztein

the relative importance of demand-side and supply-side factors, by examining price-output correlations and by developing and estimating simple sectoral supply-demand models. 1. Structural versus macroeconomic factors There is no doubt that the process of economic reform in the PCPEs must generate a reallocation of productive resources on a massive scale, and that such a process must already have begun as price and trade liberalization have exposed enterprises to domestic and foreign competition, and enterprise budget constraints have been “hardened” as

Mr. Jonathan David Ostry, Mr. Eduardo Borensztein, and Mr. Dimitri G Demekas

. 1/ 1. Price-output correlations In any market, changes in the equilibrium configuration of price and output will reflect both shifts in the demand and in the supply functions. However, if demand shifts have been relatively more important, the correlation between price and output changes will tend to be positive; while if supply shifts predominate, the correlation will be negative. If data on relative price changes and relative output changes in a cross-section of markets are collected, and if sectors that experience relatively more inflation are also those

Mr. Jonathan David Ostry and Mr. Eduardo Borensztein
This paper addresses two questions relating to the output decline in Poland since the initiation of market-oriented reforms at the beginning of 1990. First, to what extent is the decline in output a generalized phenomenon, rather than reflecting the short-term effects of resource reallocation in response to the new relative price structure? Second, what have been the main macroeconomic determinants of the output decline? In response to the first question, the paper finds relatively little evidence to favor a “structural change” view of the output decline. As far as the second question is concerned, the paper finds that both supply-side and demand-side factors have played a role, depending on the specific time period being considered.
Mr. Eduardo Borensztein, Mr. Dimitri G Demekas, and Mr. Jonathan David Ostry

on enterprises likely had an adverse impact on aggregate supply. 20 Price-Output Correlations In any market, changes in the equilibrium configuration of price and output reflect shifts in both the demand and the supply functions. However, if demand shifts have been relatively more important, the correlation between price and output changes will tend to be positive; if supply shifts predominate, the correlation will be negative. If data on relative price changes and relative output changes in a cross-section of markets are collected, and if sectors that

Mr. Eswar S Prasad and Mr. Bankim Chadha
This paper re-examines the cyclical behavior of prices using postwar quarterly data for the G-7. We confirm recent evidence that the price level is countercyclical. However, we find strong evidence that the inflation rate is procyclical in our sample. Our results show the importance of making a clear distinction between inflation and the cyclical component of the price level when reporting and interpreting stylized facts regarding business cycles.
Mr. Jonathan David Ostry, Mr. Eduardo Borensztein, and Mr. Dimitri G Demekas
This paper analyzes the declines in economic activity experienced by Bulgaria, the Czech and Slovak Federal Republic (CSFR), and Romania in the period since the initiation of market-oriented reforms in these countries. The paper reviews developments in the three countries and empirically investigates two questions that are key to the interpretation of the output decline: First, to what extent does the output fall reflect “structural change” (or a reallocation of resources across sectors) rather than a conventional recession? Second, to what extent have demand-side or supply-side forces been dominant in generating the output decline?
Mr. C. John McDermott, Mr. Eswar S Prasad, and Pierre-Richard Agénor
This paper documents the main stylized features of macroeconomic fluctuations for 12 developing countries. Cross-correlations between domestic industrial output and a large group of macroeconomic variables (including fiscal variables, wages, inflation, money, credit, trade, and exchange rates) are presented. Also analyzed are the effects of industrial country economic conditions on output fluctuations in these countries. The robustness of the results is examined using different detrending procedures. The results indicate many similarities between macroeconomic fluctuations in developing and industrial countries (procyclical real wages; countercyclical variation in government expenditure) and some important differences (countercyclical variation in the velocity of monetary aggregates).
Mr. Eswar S Prasad and Mr. Bankim Chadha

similar [see, e.g., Balke and Fomby (1991) ]. Rather than restrict ourselves to a particular technique for detrending output and prices, we prefer to take an eclectic approach and evaluate the robustness of our results across a variety of detrending procedures. In examining price-output correlations, we use four techniques to transform prices and output into stationary series. 4/ First, we detrend output and prices using a deterministic linear trend. Second, we again detrend prices using a linear trend but, along the lines suggested by the work of Perron ( 1989