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Why are Stabilizations Delayed?

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  • Alberto Alesina
  • Allan Drazen

Abstract

When a stabilization has significant distributional implications (as in the case of tax increases to eliminate a large budget deficit) different socio-economic groups will attempt to shift the burden of stabilization onto other groups. The process leading to a stabilization becomes a "war of attrition", with each group finding it rational to attempt to wait the others out. Stabilization occurs only when one group concedes and is forced to bear a disproportionate share of the burden of fiscal adjustment. We solve for the expected time of stabilization in a model of "rational" delay based on a war of attrition and present comparative statics results relating the expected time of stabilization to several political and economic variables. We also motivate this approach and its results by comparison to historical episodes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3053.

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Date of creation: Aug 1989
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Publication status: published as The American Economic Review, vol.81, no.5, (December 1991).
Handle: RePEc:nbr:nberwo:3053

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  1. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(4), pages 835-55, November.
  2. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers, Federal Reserve Bank of Minneapolis 158, Federal Reserve Bank of Minneapolis.
  3. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers, Queen's University, Department of Economics 560, Queen's University, Department of Economics.
  4. Dornbusch, Rudiger, 1991. "Credibility and Stabilization," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(3), pages 837-50, August.
  5. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(1), pages 3-20, January.
  6. Barry Eichengreen, 1991. "The Capital Levy in Theory and Practice," NBER Working Papers 3096, National Bureau of Economic Research, Inc.
  7. Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc.
  8. Helpman, Elhanan & Leiderman, Leonardo, 1988. "Stabilization in high inflation countries: Analytical foundations and recent experience," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 28(1), pages 9-84, January.
  9. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc.
  10. Bliss, Christopher & Nalebuff, Barry, 1984. "Dragon-slaying and ballroom dancing: The private supply of a public good," Journal of Public Economics, Elsevier, Elsevier, vol. 25(1-2), pages 1-12, November.
  11. Tabellini, Guido, 1986. "Money, debt and deficits in a dynamic game," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 10(4), pages 427-442, December.
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  1. Greece: a question of tough love
    by Financial Times in Economists' Forum on 2012-05-18 11:45:00
  2. La vita è come un albero di Natale (il mio primo maggio)...
    by Alberto Bagnai in Goofynomics on 2014-05-01 10:01:00
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