STRUCTURAL UNCERTAINTY AND SUBSIDY REMOVAL FOR ECONOMIES IN TRANSITION

Economies in transition are faced with a high degree of 'structural un certainty', i.e., uncertainty about which it is possible to learn thro ugh experience. We study structural uncertainty's effects on a subsidy removal program. Subsidy removal causes unemployment, but yields fisc al benefits and facilitates private sector growth. When the policymake r does not know the speed with which the private sector absorbs the un employed, he will be driven toward a more decisive, and therefore more informative, policy. The model also rationalizes policy reversals and implies that irreversibility constraints and political instability da mpen the learning effect making policy more gradualist. (C) 1997 Elsev ier Science B.V.