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Optimal Fiscal Policy in an Economy Facing Sociopolitical Instability

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  • Chetan Ghate
  • Quan Vu Le
  • Paul J. Zak

Abstract

The paper presents a model of optimal government policy when policy choices may exacerbate sociopolitical instability (SPI). The authors show that optimal policy that takes into account SPI transforms a standard concave growth model into a model with both a poverty trap and endogenous growth. The resulting equilibrium dynamics inherit the properties of government policies and need not be monotone. Indeed, for a broad set of conditions, government policy is unable to eliminate the poverty trap; when these conditions do not hold, "most" countries eventually reach a balanced growth path. The predictions of the model are tested by developing three new measures of SPI for a panel of 58 countries. Estimating optimal policies and the growth equation derived from the model reveals strong support for the theory. Copyright Blackwell Publishing Ltd 2003.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 7 (2003)
Issue (Month): 4 (November)
Pages: 583-598

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Handle: RePEc:bla:rdevec:v:7:y:2003:i:4:p:583-598

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Cited by:
  1. Chetan Ghate & Paul J. Zak, 2003. "The Politics of Endogenous Growth," Discussion Papers of DIW Berlin 320, DIW Berlin, German Institute for Economic Research.
  2. Paul J. Zak, 2002. "Institutions, Property Rights, and Growth," Recherches économiques de Louvain, De Boeck Université, vol. 68(1), pages 55-73.
  3. Jong-A-Pin, Richard, 2009. "On the measurement of political instability and its impact on economic growth," European Journal of Political Economy, Elsevier, vol. 25(1), pages 15-29, March.
  4. Moog, Stefan & Raffelhüschen, Bernd, 2009. "Ehrbarer Staat? Die Generationenbilanz - Update 2009: Wirtschaftskrise trifft Tragfähigkeit," FZG Discussion Papers 38, Research Center for Generational Contracts (FZG), University of Freiburg.
  5. Quan V. Le, 2004. "Political and economic determinants of private investment," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(4), pages 589-604.
  6. Yi Feng & Jacek Kugler & Paul Zak, . "The Path to Prosperity: A Political Model of Demographic Change," Claremont Colleges Working Papers 1999-23, Claremont Colleges.
  7. Paul J. ZAK, 2002. "Institutions, Property Rights and Growth," Discussion Papers (REL - Recherches Economiques de Louvain) 2002014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  8. Diana Weinhold & Paul J. Zak, 2005. "The Choice of Institutions: The Role of Risk and Risk-Aversion," Others 0508004, EconWPA.
  9. Aniruddha Mitra & James T. Bang, 2010. "Brain Drain and Institutions of Governance: Educational Attainment of Immigrants to the US 1988-1998," Middlebury College Working Paper Series 1026, Middlebury College, Department of Economics.
  10. Patricia Justino, 2007. "Carrot or stick? Redistributive transfers versus policing in contexts of civil unrest," Research Working Papers 3, MICROCON - A Micro Level Analysis of Violent Conflict.

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