The Benefits of Crises for Economic Reforms

Allan Drazen, Vittorio Grilli

NBER Working Paper No. 3527
Issued in December 1990
NBER Program(s):   ITI   IFM

This paper presents a model in which economic crises have positive effects on welfare. Periods of very high inflation create the incentive for the resolution of social conflict and thus facilitate the introduction of economic reforms and the achievement of higher levels of welfare. Policies to reduce the cost of inflation, such as indexation, raise inflation and delay the adoption of reforms, but have no effect on expected social welfare.

(681 K)

Published: American Economic Review, vol.83, no.3, June1993.

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