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Budget deficits and the feasibility of credit market reform

Author

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  • Pertti Haaparanta

    (Department of Economics, Helsinki School of Economics)

  • Mikko Puhakka

    (FDPE, University of Helsinki)

Abstract

We ask the question: Why is it proposed that successful structural economic reforms (such as deregulation) require accompanying fiscal policy actions? And under what conditions can gradual reforms succeed? We use a dynamic general equilibrium model. We show that financial repression increases budget deficits. We characterize precisely the extent of deficit reductions required when financial markets are deregulated rapidly. In particular; we show the conditions under which budget deficits must be reduced in the short run below the level of maximum sustainable deficits in the long-run deregulated equilibrium. Finally, we show that the deregulation of financial markets may not uniformly improve welfare. This focus on the interaction between structural reforms and fiscal policies distinguishes our work from the literature on stabilization programs. Our study of interactions between stabilization and structural policies is equally important for both developed and developing countries.

Suggested Citation

  • Pertti Haaparanta & Mikko Puhakka, 1997. "Budget deficits and the feasibility of credit market reform," Finnish Economic Papers, Finnish Economic Association, vol. 10(1), pages 35-46, Spring.
    • Handle: RePEc:fep:journl:v:10:y:1997:i:1:p:35-46
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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