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Budget deficits and the feasibility of credit market reform

  • Pertti Haaparanta

    (Department of Economics, Helsinki School of Economics)

  • Mikko Puhakka

    (FDPE, University of Helsinki)

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    We ask the question: Why is it proposed that successful structural economic reforms (such as deregulation) require accompanying fiscal policy actions? And under what conditions can gradual reforms succeed? We use a dynamic general equilibrium model. We show that financial repression increases budget deficits. We characterize precisely the extent of deficit reductions required when financial markets are deregulated rapidly. In particular; we show the conditions under which budget deficits must be reduced in the short run below the level of maximum sustainable deficits in the long-run deregulated equilibrium. Finally, we show that the deregulation of financial markets may not uniformly improve welfare. This focus on the interaction between structural reforms and fiscal policies distinguishes our work from the literature on stabilization programs. Our study of interactions between stabilization and structural policies is equally important for both developed and developing countries.

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    File URL: http://taloustieteellinenyhdistys.fi/images/stories/fep/f1997_1c.pdf
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    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 10 (1997)
    Issue (Month): 1 (Spring)
    Pages: 35-46

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    Handle: RePEc:fep:journl:v:10:y:1997:i:1:p:35-46
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    1. Azariadis Costas & Smith Bruce D., 1993. "Adverse Selection in the Overlapping Generations Model: The Case of Pure Exchange," Journal of Economic Theory, Elsevier, vol. 60(2), pages 277-305, August.
    2. Cass, David & Okuno, Masahiro & Zilcha, Itzhak., . "The Role of Money in Supporting the Pareto Optimality of Competitive Equilibrium in Consumption-Loan Type Models," Working Papers 242, California Institute of Technology, Division of the Humanities and Social Sciences.
    3. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 835-55, November.
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