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Public Finance and the Optimal Speed of Transition

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  • Castanheira, Micael

Abstract

We develop a general equilibrium model that jointly considers the influence of capital accumulation constraints and of labour market frictions on the process of transition. We endogenize the economic and budgetary costs of different government policies and show that, early in transition, governments ought to subsidize state firms. Provided that inter-temporal commitment is feasible, this policy limits the initial output fall, which relaxes capital accumulation constraints, accelerates transition, and increases welfare. Moreover, by resorting to indirect — instead of direct — taxes, governments can bring the path of transition closer to the first best. Yet, political pressures may induce a policy of excessive subsidization.

Suggested Citation

  • Castanheira, Micael, 2003. "Public Finance and the Optimal Speed of Transition," CEPR Discussion Papers 3797, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3797
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    Cited by:

    1. Alain de Crombrugghe & Gregory de Walque, 2011. "Wage and employment effects of a wage norm : The Polish transition experience," Working Paper Research 209, National Bank of Belgium.
    2. Olivier Blanchard & Michael Kremer, 1997. "Disorganization," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1091-1126.
    3. Maxim Bouev, 2004. "Diverging Paths: Transition in the Presence of the Informal Sector," William Davidson Institute Working Papers Series 2004-689, William Davidson Institute at the University of Michigan.
    4. Balla, Katalin & Köllo, János & Simonovits, András, 2008. "Transition with heterogeneous labor," Structural Change and Economic Dynamics, Elsevier, vol. 19(3), pages 203-220, September.
    5. Randolph Luca Bruno, 2006. "Optimal speed of transition with a shrinking labour force and under uncertainty," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(1), pages 69-100, March.
    6. Roberto Dell'Anno & Stefania Villa, 2013. "Growth in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 21(3), pages 381-417, July.

    More about this item

    Keywords

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    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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