It is argued that the former (the collapse of output during transition) can be best explained as adverse supply shock caused mostly by a change in relative prices after their deregulation due to distortions in industrial structure and trade patterns accumulated during the period of central planning, and by the collapse of state institutions during transition period, while the speed of liberalisation had an adverse effect on performance, if any.
First, transformational recession was caused by the adverse supply shock that resulted from deregulation of prices and change in relative price ratios that created the need for reallocation of resources due to distortions in the industrial structure and external trade patterns that existed before transition.
Or, put differently, an accelerating inflation rate is a leading indicator of an adverse supply shock.
Instead, it is indicative of the presence of an adverse supply shock.
For example, an adverse supply shock
or money demand shock could have intervened in the first or second quarter of 1995 (other shocks).
In my paper, however, a low-inflation regime can be upset by an adverse supply shock
Consider the effect on the ex ante real interest rate from a temporary, adverse supply shock
, such as a harvest failure in an agricultural, closed economy.
An inflation target requires the central bank to tighten in response to an adverse supply shock
and to ease monetary policy in response to a favorable supply shock, compounding the change in real output resulting from the supply shock.
When an adverse supply shock
hits a two-country Mundell-Fleming world, it causes unemployment and a rise in the cost of living.
adverse supply shocks
in the 1970s), the significant short-term PC disappears quickly.
It could also improve the Fed's latitude to conduct stabilization policy--enabling it to respond to the negative real impacts of adverse supply shocks
This combination, rather than only adverse supply shocks
such as a drop in productivity, explains much of the performance of the U.