The Myth of the East Asian Miracle: The Macroeconomic Implications of Soft Budgets

12 Pages Posted: 20 Mar 1999

See all articles by Chong-En Bai

Chong-En Bai

The University of Hong Kong - School of Economics and Finance; University of Michigan - William Davidson Institute

Yijiang Wang

University of Minnesota - Twin Cities - Carlson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 1998

Abstract

Consider an economy with a high risk and high return and a low risk and low return asset and risk-averse agents making intertemporal consumption and investment decisions. The agent will choose a savings rate to balance current and future consumptions, and an investment portfolio to balance between return and risk. A government program to insure the high risk and high return asset will lead to increased investment in the asset, which in turn leads to higher total return, total risk and total savings in the economy, even if ex ante the program constitutes zero expected subsidy. The agent is worse off under such a program. These results reflect on the experiences of a number of Asian economies featured by interventionist government, high savings, high growth and recent financial crisis.

JEL Classification: G12

Suggested Citation

Bai, Chong-En and Wang, Yijiang, The Myth of the East Asian Miracle: The Macroeconomic Implications of Soft Budgets (June 1998). Available at SSRN: https://ssrn.com/abstract=156989 or http://dx.doi.org/10.2139/ssrn.156989

Chong-En Bai (Contact Author)

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Yijiang Wang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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