FROM CENTRALLY PLANNED TO MARKET-ECONOMY - THE ROAD FROM CPE TO PCPE

The early stages of transformation of centrally planned economiies into market economies are examined. In the transitional phase when an economy is no longer centrally planned, but not yet market based-when it is a "previously centrally planned economy"-expectations play a key role. A model is developed to analyze the consequences of expected price liberalization, and the benefits from early development of financial markets and speedy implementation of price reform are demonstrated. Ways to reduce liquidity overhang are examined, the consequences of privatization are analyzed, and the benefits of an effective tax system are highlighted.