This essay surveys macroeconomic issues that marked the transition from planned to market economy in Central and Eastern European and former Soviet Union countries. We first establish stylized facts of the transition so far. We then critically survey the theoretical literature on transition, discussing explanations for the initial output fall, and mediumterm issues such as optimal speed of transition, disorganization, institutions and sectoral reallocation as source of output dynamics. We review the empirical literature to assess how well it translates the theoretical models and explains the stylized facts. We conclude with suggestions for future research.

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.

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Abstract:In the wake of the global financial crisis, several macroeconomic contributions have highlighted the risks of excessive credit expansion. In particular, too much finance can have a negative impact on growth. We examine the microeconomic foundations of this argument, positing a non-monotonic relationship between leverage and firm-level productivity growth in the spirit of the trade-off theory of capital structure. A threshold regression model estimated on a sample of Central and Eastern European countries confirms that TFP growth increases with leverage until the latter reaches a critical threshold beyond which leverage lowers TFP growth. This estimate can provide guidance to firms and policy makers on identifying "excessive" leverage. We find a similar non-monotonic relationship between leverage and proxies for firm value. Our results are a first step in bridging the gap between the literature on optimal capital structure and the wider macro literature on the finance-growth nexus.

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This paper uses a sample of 116 recession episodes in developed and emerging market economies to compare the labor-market recovery during financial crises with that of other recession episodes. It documents two new stylized facts. First, labor-market recovery from financial crises is characterized by either higher unemployment ("jobless recovery") or a lower real wage ("wageless recovery"). Second, inflation determines the type of recovery: low inflation (below 30 percent annual rate) is associated with jobless recovery, while high inflation is associated with wageless recovery. The paper shows that this pattern of labor recovery from financial crises is consistent with a simple model in which collateral requirements are higher (lower) when a larger share of labor costs (physical capital expenditure) is involved in a loan contract.

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