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Financial arrangements, 'soft' budget constraints and inflation: lessons from the Yugoslav experience

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  • Claudio E. V. Borio

Abstract

This paper explores primarily how financial arrangements may be responsible for creating or exacerbating inflationary pressures in Yugoslavia. The ways in which financial arrangements can contribute to inflation are discussed under three different headings: misallocation of savings and credit, failure to enforce financial discipline and accommodation by the monetary authorities. Ultimately, however, these are to a significant extent manifestations of the same phenomenon. They describe a situation where resources can be obtained without adequate screening and monitoring, where their apparent cost does not reflect their scarcity value, where agents are capable of shifting the costs of economic failure on to the "government", where, therefore, there do not exist proper mechanisms for discriminating between productive and unproductive economic behaviour. Under these conditions, not only can inflation be generated or perpetuated, but traditional measures of government transfers and related monetary financing lose much of their significance.

Suggested Citation

  • Claudio E. V. Borio, 1990. "Financial arrangements, 'soft' budget constraints and inflation: lessons from the Yugoslav experience," BIS Working Papers 15, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:15
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    References listed on IDEAS

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    1. McKinnon, Ronald I., 1982. "The order of economic liberalization: Lessons from Chile and Argentina," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 159-186, January.
    2. Courakis, Anthony S, 1984. "Constraints on Bank Choices and Financial Repression in Less Developed Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 46(4), pages 341-370, November.
    3. Corbo, Vittorio & de Melo, Jaime, 1987. "Lessons from the Southern Cone Policy Reforms," World Bank Research Observer, World Bank Group, vol. 2(2), pages 111-142, July.
    4. Gelb, Alan & Honahan, Patrick, 1989. "Financial sector reforms in adjustment programs," Policy Research Working Paper Series 169, The World Bank.
    5. Massad, Carlos & Zahler, Roberto, 1987. "Another view of the Latin American crisis: domestic debt," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    6. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
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    Cited by:

    1. Aizenman, Joshua & Isard, Peter, 1993. "Externalities, incentives, and failure to achieve national objectives in decentralized economies," Journal of Development Economics, Elsevier, vol. 41(1), pages 95-114, June.

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