The Blind Man's Subsidies: Output, Inflation and Unemployment in Transition Economies - A General Framework

Abstract: We model the introduction of hard budget constraints in a transition economy. The model, set in continuous time, is designed to address the interaction between the hardening of such constraints and the speed of restructuring in the industrial sector. We emphasize the impact policy changes will have on the old capital stock with respect to the rate of firm's bankruptcies on the one hand, and to increases in aggregate labor productivity on the other. We then extend the analysis to studythe speed with which 'de novo' investment will take place, under alternative government policies.;