Orszag, Peter Richard
(1997)
Dynamic analysis of regime shifts under uncertainty: Applications to hyperinflation and privatization.
PhD thesis, London School of Economics and Political Science.
Abstract
Many policy decisions involve discontinuous and irreversible shifts, often in the face of substantial uncertainty. This dissertation studies two types of regime shifts under uncertainty: stabilization from hyperinflation, and privatization of a government corporation. In both cases, policy-makers face decisions that involve uncertainty and irreversibility. These topics are examined using a theoretical model (Chapter 1), econometric evidence (Chapter 2), and a case study (Chapter 3). The first chapter presents a real options model of stabilization given uncertainty over the behavior of inflation. The model is used to argue that despite the costs of hyperinflation, stabilization delays do not necessarily indicate either irrationality or the presence of political economy effects. The second chapter constructs a comprehensive data set of hyperinflations over the past 35 years. The data set is used to examine the empirical regularities of high inflation episodes, and to test the predictions of the model presented in Chapter 1. We conclude that (1) high inflation is rare; (2) most high inflation episodes are short; (3) most economies experience only one high inflation; (4) high inflation is noisy but not necessarily explosive; (5) many high inflations end without a large fall in inflation; and (6) there is weak evidence supporting the real options approach to stabilizations. The third chapter studies another type of regime shift, that of moving a corporation from public to private ownership. The proposed privatization of the U.S. Enrichment Corporation (USEC) illustrates the costs and benefits of privatization. While a private firm would be more efficient, privatization may endanger a crucial nuclear non-proliferation program of the U.S. government. The chapter examines the uranium enrichment market; analyzes the proposed privatization of USEC within a framework developed by Jones, Tandon and Vogelsang (1990); and extends the analysis to incorporate limited information and irreversibility.
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