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“ In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.”

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In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.”

-Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget making process.


Disagreement delay and deficits

Disagreement, Delay, and Deficits

Jessica Wallack

Graduate School of International Relations and Pacific Studies

University of California, San Diego


Why are fiscal and other reforms delayed

Distributional conflict …

… but how does distributional conflict turn into delay?

Theaccuracy, timeliness, and availabilityof social and economic data varies widely across countries.

When publicly available data is less timely and less accurate, policymakers rely more on heterogeneous private data or personal experience to determine the appropriate policy.

Greater reliance on private information leads to greater variance of beliefs about the world - more disagreement.

Disagreement among policymakers about the objective economic situation delays resolution of distributional conflict.

Why are fiscal (and other) reforms delayed?


Consequences of Inaccurate Information:

Mean Effect vs. Variance Effect

Mean Effect

Inaccurate common information

shifts average policymaker’s belief

Opinions about cost of deficit

The presence of common information reduces variation in beliefs…

… however, less accurate common information reduces variation less.

Variance Effect

Opinions about cost of deficit


Findings
Findings

Countries with accurate economic statistics reduce high deficits faster than countries with less accurate economic statistics.

Executive-centered systems

also reduce high deficits faster


Measuring information quality
Measuring Information Quality

  • Ideal Measures:

    • Reputation of data among policymakers in each country

    • Objective size of error in data

  • Feasible Measures:

    • Variance of price level estimates (Penn World Tables)

    • Information Index:

      • First Principal Component of:

        • Penn World Tables Variance (0.284)

        • Ability to Monitor: external data reputation (0.535)

        • World Bank Rating: coverage, frequency, timeliness (0.588)


Third variables and other influences political and governance culprits
Third Variables and Other Influences: Political and Governance Culprits

  • Political Institutions (DPI)

    • Executive-centered (0) / Parliamentary (2)

    • # of veto players

    • Degree of polarization among veto players

    • Democracy (Polity IV Index)

  • Level of Development(log GDP per capita)

  • Transparency (ICRG, 0-6)

  • Quality of Bureaucracy (ICRG, 0-6)

  • Debt Burden(Lagged)


Spearman Correlations Governance Culprits

Information Quality, Political Institutions, Governance


Accuracy of economic statistics
Accuracy of Economic Statistics Governance Culprits


Measuring delay
Measuring Delay Governance Culprits

  • Deficits: A panel of “policy stance” observations.

    • Various Measures: (1) Primary, (2) Central Government, (3) Consolidated CG, (4) Public Sector

    • All measures scaled: + deficit, - surplus

  • Error Correction Model: Estimates percent of above – (country) average deficit eliminated annually.

    • Allows for Asymmetric Adjustment

    • Controls for economic fluctuations.


Summary Statistics Governance Culprits


Basic error correction model with asymmetric adjustment
Basic Error Correction Model with Asymmetric Adjustment Governance Culprits

Δdt = α +β1(dj,t-1 – dj*) +β2T*(dj,t-1 – dj*) +α1 Shocksj,t-1 +vjt

β1 :Speed of deficit growth for relatively small deficits (-)

β2:Incremental effect on

adjustment speed for relatively large deficits (+)

β1 + β2:Speed of deficit reduction for relatively large deficits (-)


Significant Asymmetry Governance Culprits

Control Variables: Growth Changes. Robust standard errors in parentheses

*** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.


Political and information effects fixed effects with interaction terms
Political and Information Effects: Fixed Effects with Interaction Terms

Δdt = α

+β1(dj,t-1 – dj*)

+β2 Tj,t-1*(dj,t-1 – dj*)

+β3 Infoj*(dj,t-1 – dj*)

+β4Infoj*Tj,t-1*(dj,t-1 – dj*)

+β5k Poljk *(dj,t-1 – dj*)

+β6k Poljk *Tj,t-1*(dj,t-1 – dj*)

+α1Tj,t-1 + α2Tj,t-1*Infoj

+ α3kTj,t-1*Poljk

+ α4Shocksj,t-1 +μj+ɛjt

Sum gives “Information Effect” on deficit reduction speed

Sum gives “Political Effect” on deficit reduction speed


Slow Adjustment, Below-Average Information Quality Interaction Terms

Deficit Reduction

Speed: -0.281

Information

Rating: 0.6


Medium Adjustment, Below Average Information Quality Interaction Terms

Deficit Reduction Speed: - 0.417

Information

Rating: 0.60


Faster Adjustment, Better Information Quality Interaction Terms

Deficit Reduction Speed: -0.596

Information

Rating: 0.8


Medium Adjustment, Best Information Quality Interaction Terms

Deficit Reduction Speed: -0.468

Information

Rating: 1


Fast Adjustment, Best Information Quality Interaction Terms

Deficit Reduction Speed: -1.070

Information Rating: 1.00


Findings1
Findings Interaction Terms

  • More accurate information associated with faster deficit reduction

  • Executive-Centered associated with faster deficit reduction than parliamentary government

  • Polarization, checks & balances, governance: no statistically significant effect.


Effect of Information Accuracy on Deficit Reduction Speed: Interaction Terms (b3 + b4 )

Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).


Effect of Information Accuracy on Deficit Reduction Speed (Information Index)

Extra percentage points of above-average deficit reduced in a given year from an increase of 1 standard deviation of information index.


Primary deficit vs public deficit low information quality
Primary Deficit vs. Public Deficit (Information Index)(Low Information Quality)


Primary deficit vs public deficit higher information quality
Primary Deficit vs. Public Deficit (Information Index)(Higher Information Quality)




Information and economic outcomes
Information and (Information Index)Economic Outcomes

  • Demonstrated connection between information quality and speed of policy change

  • Implication: better data improves policymaking as well as policy.

    • credible economic and social data speeds reform

    • important to provide policymakers with information they perceive as relevant and useful.


New avenues for research
New Avenues for Research (Information Index)

  • Why is more accurate economic information associated with faster reform?

  • Testing “variance effect” more directly:

    • Interaction with country institutions, specific reform settings

    • Interaction with underlying disagreement

  • Other questions to ask about data:

    • Bias of data providers

    • Timeliness

  • What factors lead to investment in better publicly available information?


  • (Information Index)In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.”

    -Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget making process.


    Significant Asymmetry (Information Index)

    Benchmark: Sustainable Deficit

    Control Variables: Growth Changes. Robust standard errors in parentheses

    *** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.


    Effect of Information Accuracy on Deficit Reduction Speed: (Information Index) (b3 + b4 )

    Benchmark: “Sustainable” Deficit

    Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).


    Deficit reduction speeds individual country estimates
    Deficit Reduction Speeds: (Information Index)Individual Country Estimates


    Adjustment speed and information quality ols on country estimates
    Adjustment Speed and Information Quality (Information Index)(OLS on Country Estimates)

    Robust standard errors in parentheses.


    Adjustment speed and information quality ols on country estimates1
    Adjustment Speed and Information Quality (Information Index)(OLS on Country Estimates)

    Robust standard errors in parentheses.


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