Public Finance and the Optimal Speed of Transition
AbstractWe develop a general equilibrium model that jointly considers the influence of capital accumulation constraints and of labour market frictions on the process of transition. We endogenize the economic and budgetary costs of different government policies and show that, early in transition, governments ought to subsidize state firms. Provided that inter-temporal commitment is feasible, this policy limits the initial output fall, which relaxes capital accumulation constraints, accelerates transition, and increases welfare. Moreover, by resorting to indirect — instead of direct — taxes, governments can bring the path of transition closer to the first best. Yet, political pressures may induce a policy of excessive subsidization.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3797.
Date of creation: Feb 2003
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Other versions of this item:
- Micael Castanheira, 2003. "Public finance and the optimal speed of transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(3), pages 435-462, 09.
- Micael Castanheira De Moura, 2003. "Public finance and the optimal speed of transition," ULB Institutional Repository 2013/10007, ULB -- Universite Libre de Bruxelles.
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General
This paper has been announced in the following NEP Reports:
- NEP-TRA-2003-07-13 (Transition Economics)
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