Premium
Do Crises Induce Reform? Simple Empirical Tests of Conventional Wisdom
Author(s) -
Drazen Allan,
Easterly William
Publication year - 2001
Publication title -
economics and politics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.822
H-Index - 45
eISSN - 1468-0343
pISSN - 0954-1985
DOI - 10.1111/1468-0343.00087
Subject(s) - economics , inflation (cosmology) , black market , deficit spending , monetary economics , empirical evidence , per capita , current account , real interest rate , inflation rate , interest rate , macroeconomics , exchange rate , sociology , debt , population , philosophy , physics , epistemology , theoretical physics , market economy , demography
We find evidence for the crisis‐induces‐reform hypothesis at extreme values of the inflation rate and the black market premium. Episodes of extremely high inflation or black market premiums are followed by periods of better performance than episodes of moderately high inflation or black market premiums. We fail to find similar evidence of the crisis hypothesis when crisis is measured as a high current account deficit, a high budget deficit, or a negative per capita growth rate. The pattern of foreign aid disbursements may help explain the results. Foreign aid is reduced at extreme values of inflation or the black market premium, while it is actually increased for more extreme values of the current account deficit and the budget deficit.