The Benefits of Crises for Economic Reforms, Issue 3527
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.
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1050 Massachusetts Avenue according to T(0 affects social welfare agents involved agrees to bear Alesina and Drazen Allan Drazen Vittorio Angrist argument attrition Ben Bernanke BENEFITS OF CRISES Bernanke Bureau of Economic concede immediately consumption cost function cost of inflation cost of waiting costs associated distortionary taxation Drazen Vittorio Grilli dynamic model ECONOMIC REFORMS Economic Research equilibrium equilibrium level example expected social welfare expected utility finance Fischer and Summers fixed cost function of inflation government budget Grilli Working Paper high inflation high levels higher implies increase individual of type individual utility individual who bears induce agreement inflation tax instantaneous welfare intuition level of inflation level of utility maximize expected monetization parameter monotonically decreasing NBER necessary policy changes Number optimal concession optimal level optimal rate policy choice present discounted utility raise welfare rate of inflation real interest rate simulation results structural change tax burden utility cost utility loss welfare improving