In countries of Central and Eastern Europe, privatization of state owned enterprises is the central element of transition to a market economy. The objective of this research is to investigate the relationship between speed of privatization and changes in output, with particular emphasis on the role of unemployment and fiscal policy. The issue can be stated as: how should government choose the downsizing of the state sector and the path of taxation to achieve a desirable resource allocation in the transition economy. The theoretical part of the research consists of developing a consistent macroeconomic framework for a transition economy with a job matching process in order to analyze the effects and welfare implications of alternative privatization and taxation schemes. The model is a general equilibrium model, i.e. it captures the interaction of all variables in the model. By incorporating the job matching process, the model takes into account the regional and skill mismatch between unemployed workers and available vacancies that currently exists across countries of Eastern Europe and, thus, provides a suitable framework for studying the optimal speed of privatization. The empirical part involves collecting data on output, employment, unemployment, fiscal expenditures, and taxes for each country and then estimating the general equilibrium model. ***
