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Institutions and Fiscal Policy

Institutions and Fiscal Policy. 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?. Deficits.

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Institutions and Fiscal Policy

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  1. Institutions and Fiscal Policy

  2. Dimensions of Fiscal Policy • Deficits and debt • Speed of adjustment and overall debt burden • The overall size of government • General versus targeted expenditures • Redistribution

  3. Deficits • Why might a benevolent dictator run deficits?

  4. 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.

  5. Political institutions and debt • A finding that emerged in the 1980s: Coalition government and deficits • Causal logic?

  6. 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.

  7. 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

  8. 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?

  9. 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.

  10. 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

  11. 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

  12. 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?

  13. 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.

  14. Critiques? • What is missing?

  15. 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

  16. Causality?

  17. Causality? • Matching • Instruments • Year of adoption of constitution • Hall and Jones (1999) instruments • Latitude, % English speaking, % European native tongue

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