Effects of Government Policy Changes on the Private Sector Development in a Transitional Economy: A Long-run Analysis

The purpose of this paper is to investigate the long-run effects of government policy changes on the private sector development in a transitional economy. The policy changes include (i) increases in the nominal interest rate on deposits in the state banking system, (ii) increases in the tax rates on labor income and corporate income, and (iii) implementation of further enterprise reforms in the state sector. The private sector development is measured by the size of the sector, its labor employment share, investment share, and output share in the economy. Interestingly, our results suggest that an increase in the nominal interest rate on bank deposits will hinder the development of the private sector; while an increase in the effective labor income tax may enhance it.