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Hardened Budget Constraints in Romania: An Approach by CGE Modeling

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  • Rodica Sandu-Loisel

Abstract

This study estimates the effects of hardened budget constraints on the Romanian economy and tests a market price-based policy by removing state subsidies. As most subsidies are granted to and through the energy sector, the analysis focuses on energy issues. A general equilibrium approach is used for the empirical application. The results fit the theory and show that removing subsidies contributes to eliminating distortions: energy intensity declines, the Gini coefficient drops and general welfare improves. The main effects of applying a cost recovery policy are the improvement of agents' self-financing capacity and of their investment structure. Surprisingly, production cost falls in all sectors, since cross-subsidies are removed.

Suggested Citation

  • Rodica Sandu-Loisel, 2007. "Hardened Budget Constraints in Romania: An Approach by CGE Modeling," Post-Communist Economies, Taylor & Francis Journals, vol. 19(1), pages 93-115.
    • Handle: RePEc:taf:pocoec:v:19:y:2007:i:1:p:93-115
    DOI: 10.1080/14631370601163269
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    References listed on IDEAS

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    1. Haizhou Huang & Chenggang Xu, 1999. "Financial Institutions, Financial Contagion, and Financial Crises," CID Working Papers 21, Center for International Development at Harvard University.
    2. World Bank, 2003. "Romania : Poverty Assessment, Volume 2. Background Papers," World Bank Publications - Reports 14700, The World Bank Group.
    3. Erno Zalai, 1998. "Computable Equilibrium Modelling and Application to Economies in Transition," CERT Discussion Papers 9804, Centre for Economic Reform and Transformation, Heriot Watt University.
    4. Hosoe, Nobuhiro, 2006. "The deregulation of Japan's electricity industry," Japan and the World Economy, Elsevier, vol. 18(2), pages 230-246, March.
    5. World Bank, 2003. "Romania : Poverty Assessment, Volume 1. Main Report," World Bank Publications - Reports 14644, The World Bank Group.
    6. Haizhou Huang & Chenggang Xu, 1999. "Financial Institutions, Financial Contagion, and Financial Crises," CID Working Papers 21A, Center for International Development at Harvard University.
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    Cited by:

    1. International Monetary Fund, 2010. "Islamic Republic of Iran: Selected Issues Paper," IMF Staff Country Reports 2010/076, International Monetary Fund.

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