Vol. 10, No. 1

Christof Rühl and Viatcheslav Vinogradov:
Social cohesion in economic development: employment and wages (pp. 3–19)


The paper investigates the role of social cohesion in economic development. We capture ’social cohesion’ as society swillingness to accept lower wages to maintain high employment, and as its willingness to offer benefit payments to the unemployed. The lower the minimum wage rate and the higher the welfare payments, the more cohesive the society, and vice versa. We compare two economies which differ only in this respect. We analyze how they react to shocks of different magnitudes. We show that for minor disturbances the less cohesive economy exhibits superior performance, while the reverse becomes true as the size of the shock increases. The Central and Eastern European transition economies exemplify the argument.

Elias L. Khalil:
Symbolic inputs: positional, reference and publicity goods (pp. 20–34)


Symbolic value differs from intrinsic value. This paper focuses on symbolic inputs, which make up the production function, and ignores symbolic products (e.g., status, prestige), which constitute the utility function. Symbolic inputs are occasioned by incomplete information. There are three kinds of symbolic inputs, following three kinds of incomplete information. »Positional symbolic inputs» minimize search cost necessitated by local information. »Reference symbolic inputs» reduce inspection cost occasioned by asymmetric information. »Publicity symbolic inputs» lessen haggling cost prompted by private information. The paper evaluates the effectiveness of symbolic inputs in light of the difference between efficiency and productivity.

(JEL: D0)

Pertti Haaparanta and Mikko Puhakka:
Budget deficits and the feasibility of credit market reform (pp. 35–46)


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.

(JEL: H62, E44, O16)

Finnish Economic Papers 1/1997