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 intertemporal 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 suboptimal subsidization. Copyright (c) The European Bank for Reconstruction and Development, 2003.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/10007.
Date of creation: 2003
Date of revision:
Publication status: Published in: The Economics of Transition (2003) v.11 nÂ° 3,p.435-462
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.
- Castanheira, Micael, 2003. "Public Finance and the Optimal Speed of Transition," CEPR Discussion Papers 3797, C.E.P.R. Discussion Papers.
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General
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