Output Collapse in Transitional Economies: A Possible Explanation Using a Two-sector Mesoeconomic Model

Using a two-sector mesoeconomic model, the paper examines the short-term effects of the demand shift between different sectors resulted from the economic liberalisation in a transitional economy, especially focussing on Russia. Findings are that, for a transitional economy without a well-functioning factor market, the demand shift may cause a short term economic slump. Moreover, the possibility of an economic slump is higher when there are unfavorable effects from changes in the price elasticity of demand.