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The Benefits of Crises for Economic Reforms

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  • Allan Drazen
  • Vittorio Grilli

Abstract

This paper presents a model in which economic crises have positive effects on welfare. Periods of very high inflation create the incentive for the resolution of social conflict and thus facilitate the introduction of economic reforms and the achievement of higher levels of welfare. Policies to reduce the cost of inflation, such as indexation, raise inflation and delay the adoption of reforms, but have no effect on expected social welfare.

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File URL: http://www.nber.org/papers/w3527.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3527.

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Date of creation: Dec 1990
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Publication status: published as American Economic Review, vol.83, no.3, June1993.
Handle: RePEc:nbr:nberwo:3527

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  1. Laurence Ball & Stephen G. Cecchetti, 1989. "Wage Indexation and Time-Consistent Monetary Policy," NBER Working Papers 2948, National Bureau of Economic Research, Inc.
  2. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  4. Stanley Fischer & Lawrence H. Summers, 1989. "Should Nations Learn to Live With Inflation?," NBER Working Papers 2815, National Bureau of Economic Research, Inc.
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