Bridging “the Great Divide”: Countering Financial Repression in Transition
AbstractThe large and widening gap between economic performance in Eastern European transition economies and those of the former Soviet Union has been dubbed “the Great Divide” by Berglof and Bolton (2002). This paper provides a rationale for the gap based upon the concept of financial repression. The magnified effects of transition to the market can be attributed to the government manipulation of financial markets in these countries, with the divide defined by the length of time that governments relied upon financial-market manipulation to finance government fiscal policy. Policies undertaken to assist in financing government expenditures caused financial repression and financial fragmentation, to use the terms introduced by McKinnon (1973). After an introductory section, I introduce a theoretical model of real and financial sectors in transition. The dynamic path to equilibrium from transition is derived. It is shown to have a tendency toward output contraction and hyperinflation when government policies promote financial repression. In the third section this hypothesis is examined with macroeconomic data from Ukraine for the period 1992 - 2001. These data are consistent with the hypothesis, although other factors (e.g., recession in trading partners) are also shown to be important.
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Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 510.
Length: 41 pages
Date of creation: 02 May 2002
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Transition Economies; Financial Repression; Inflation; Real balances;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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