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Institutions and Fiscal Policy Institutions and Fiscal Policy

Institutions and Fiscal Policy - PowerPoint Presentation

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Institutions and Fiscal Policy - PPT Presentation

Dimensions of Fiscal Policy Deficits and debt Speed of adjustment and overall debt burden The overall size of government General versus targeted expenditures Redistribution Deficits Why might a benevolent dictator run deficits ID: 779891

deficits government expenditures party government deficits party expenditures coalition electoral parliamentary presidential size voters parties districts debt costs coalitions

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Presentation Transcript

Slide1

Institutions and Fiscal Policy

Slide2

Dimensions of Fiscal Policy

Deficits and debt

Speed of adjustment and overall debt burden

The

overall size of

government

General versus targeted expenditures

Redistribution

Slide3

Deficits

Why might a benevolent dictator run deficits?

Slide4

Deficits

Why might a benevolent dictator run deficits?

Finance capital projects

Smooth tax rates and expenditures over time

Keynesian management: Borrow during recession to stimulate demand.

Slide5

Political institutions and debt

A finding that emerged in the 1980s: Coalition government and deficits

Causal logic?

Slide6

Coalition governments and debt

“Overfishing the common pool.”

Each party in the coalition is not internalizing the full costs of the expenditure demands it makes

Solutions to this problem?

“War of attrition” and delayed stabilization

When adjustment is needed, each party believes the other should bear the costs.

Slide7

Instability and deficits

Expected probability of reelection might be important

If I expect to be in power in the next period, I face incentives not to generate excessive deficits

But if I expect to lose, take everything and externalize the costs on successor

Tie the hands of successors to prevent them from making undesirable expenditures

Slide8

Electoral budget cycles

Taxes fall and expenditures increase in election years.

How should we interpret this? Are voters gullible?

Can voters ever punish fiscal indiscipline? Do they?

What is the role of credit markets?

Slide9

The size of government

Proportional representation versus SMD:

Persson

, Roland,

Tabellini

(2007), “Electoral common pool problem”: Voters can discriminate between the parties of a coalition at the polls, but they cannot discriminate between factions of a single party government. This creates electoral conflict, and a common pool problem, within a coalition government but not within a single-party government.

Slide10

The size of government

Presidential vs. parliamentary:

P/T: Concentration of power in parliamentary systems, checks and balances in presidential

Weaker accountability yields higher rents and higher expenditures under parliamentary

P/T: A story about legislative cohesion, no confidence procedure:

In parliamentary regime, stable majority of incumbent legislators can benefit from spending while externalizing the costs onto “outsiders,” while there is competition to get into the winning coalition in presidential systems

Slide11

The size of government

Evidence:

Appear to be large effects on size of government for both

More recent work (PRT 2007): The effect of electoral rules flows through the number of parties/coalitions

Slide12

General versus targeted expenditures

District magnitude:

P/T 2000: Assume two parties who can commit to their platforms. Larger districts diffuse electoral competition, forcing parties to seek support from broad coalitions. Small districts induce focus on narrow geographic constituencies

Similar story with different modeling strategy in

Lizzeri

and

Persico

(2001). Similar story with far more complex model in

Milesi-Ferretti

,

Perotti

, and

Rostagno

(2002). Better empirics?

Slide13

General versus targeted expenditures

Presidential versus parliamentary

PRT (2000): Incumbent legislators elected by retrospective voters in different districts.

In parliamentary system, stable majority of legislators pursues joint interests of its voters. This yields broad social transfers, public goods.

Presidential system: No party discipline, interests of different minorities pitted against one another. Fleeting coalitions of special interest groups, districts.

Slide14

Critiques?

What is missing?

Slide15

What is missing?

More sophisticated understanding of

presidentialism

outside the USA

Partisan composition of legislatures

Sort out district structure versus electoral rules

Party lists, internal party procedures

Decree powers

Slide16

Causality?

Slide17

Causality?

Matching

Instruments

Year of adoption of constitution

Hall and Jones (1999) instruments

Latitude, % English speaking, % European native tongue