Public finance and the optimal speed of transition

Micael Castanheira

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

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 intertemporal 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 suboptimal subsidization.

Date: 2003
Note: FLWIN
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Citations: View citations in EconPapers (6)

Published in: The Economics of Transition (2003) v.11 n° 3,p.435-462

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Journal Article: Public finance and the optimal speed of transition (2003)
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