Working Paper: CEPR ID: DP993
Authors: Bankim Chadha; Fabrizio Coricelli
Abstract: This paper develops a model of the process of reallocation of resources from a declining state sector to an expanding private sector. The transition is shown to be costly in that it entails unemployment and a deterioration of the fiscal balance. The interaction of fiscal constraints with the transition process is examined. It is shown that fiscal constraints may induce the government to maintain the state sector, slowing the speed of transition, and could jeopardize the eventual outcome of the process of restructuring.
Keywords: restructuring; unemployment; transition; fiscal constraints
JEL Codes: E24; P20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal constraints (H60) | Slower transition process (P39) |
| Maintaining the state sector (L32) | Temporary reduction in unemployment (J65) |
| Tightening fiscal constraints (E62) | Fiscal trap (E62) |
| Fiscal trap (E62) | Prolonged unemployment (J64) |
| Fiscal trap (E62) | Budget deficits (H62) |
| Fiscal constraints (H60) | Increased unemployment (J64) |
| Fiscal constraints (H60) | Deteriorating budget balances (H68) |