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
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Slide1
Institutions and Fiscal Policy
Slide2Dimensions of Fiscal Policy
Deficits and debt
Speed of adjustment and overall debt burden
The
overall size of
government
General versus targeted expenditures
Redistribution
Slide3Deficits
Why might a benevolent dictator run deficits?
Slide4Deficits
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.
Slide5Political institutions and debt
A finding that emerged in the 1980s: Coalition government and deficits
Causal logic?
Slide6Coalition 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.
Slide7Instability 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
Slide8Electoral 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?
Slide9The 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.
Slide10The 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
Slide11The 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
Slide12General 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?
Slide13General 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.
Slide14Critiques?
What is missing?
Slide15What 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
Slide16Causality?
Slide17Causality?
Matching
Instruments
Year of adoption of constitution
Hall and Jones (1999) instruments
Latitude, % English speaking, % European native tongue