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A macroeconomic model of Russian transition

  • Serguey Braguinsky
  • Roger Myerson

We present a model in which capital assets can only be owned by members of a relatively small politically connected elite ('the oligarchs'), each member of which faces a given risk of being expropriated, and we investigate the implications of such an imperfection of property rights for the transition to a market economy. At the start of the transition, the oligarchs are long on local capital assets but short on safe deposits abroad. This causes a depression phase characterized by acute liquidity constraints and large capital outflows at the same time. As the oligarchs acquire enough safe deposits, the economy enters a recovery phase, still accompanied by capital outflows. The model can parsimoniously explain both the steep decline suffered by the Russian economy in the first stage of its transition to a market economy and the subsequent turnaround. The decline could be avoided by allowing foreigners to own some domestic capital assets, but home-country oligarchs may not be able credibly to collectively commit to such a reform. Copyright (c) 2007 The Authors Journal compilation (c) 2007 The European Bank for Reconstruction and Development.

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Article provided by The European Bank for Reconstruction and Development in its journal Economics of Transition.

Volume (Year): 15 (2007)
Issue (Month): 1 (03)
Pages: 77-107

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Handle: RePEc:bla:etrans:v:15:y:2007:i:1:p:77-107
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  1. Roland, Gérard & Verdier, Thierry, 1997. "Transition and the Output Fall," CEPR Discussion Papers 1636, C.E.P.R. Discussion Papers.
  2. Terry Sicular, 1998. "Capital Flight and Foreign Investment: Two Tales from China and Russia," UWO Department of Economics Working Papers 9803, University of Western Ontario, Department of Economics.
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