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The Benefit of Crises for Economic Reforms

  • Drazen, Allan
  • Grilli, Vittorio

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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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 83 (1993)
Issue (Month): 3 (June)
Pages: 598-607

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Handle: RePEc:aea:aecrev:v:83:y:1993:i:3:p:598-607
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  1. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  2. Laurence Ball & Stephen G. Cecchetti, 1989. "Wage Indexation and Time-Consistent Monetary Policy," NBER Working Papers 2948, National Bureau of Economic Research, Inc.
  3. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  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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