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Debts and Deficits with Fragmented Fiscal Policymaking

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  • Andres Velasco
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    Abstract

    This paper develops a political-economic model of fiscal policy - one in which government resources are a common property' out of which interest groups can finance expenditures on their preferred items. This setup has striking macroeconomic implications. Transfers are higher than a benevolent planner would choose; fiscal deficits emerge even when there are no reasons for intertemporal smoothing, and in the long run government debt tends to be excessively high; peculiar time profiles for transfers can emerge, with high positive net transfers early on giving way to high taxes later on; and multiple dynamic equilibrium paths can occur starting at the same initial level of government debt.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6286.

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    Date of creation: Nov 1997
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    Publication status: published as Velasco, Andres. "Debts And Deficits With Fragmented Fiscal Policymaking," Journal of Public Economics, 2000, v76(1,Apr), 105-125.
    Handle: RePEc:nbr:nberwo:6286

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    1. Robert Holzmann, 1991. "Budgetary Subsidies in Centrally Planned Economies in Transition," IMF Working Papers 91/11, International Monetary Fund.
    2. Rustichini, A, 1992. "Second Best Equilibria for Games of Joint Exploitation of a Productive Asset," Economic Theory, Springer, vol. 2(2), pages 191-96, April.
    3. Tornell, Aaron & Velasco, Andes, 1992. "The Tragedy of the Commons and Economic Growth: Why Does Capital Flow from Poor to Rich Countries?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(6), pages 1208-31, December.
    4. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans and debt," Staff Report, Federal Reserve Bank of Minneapolis 125, Federal Reserve Bank of Minneapolis.
    5. Ernesto H. Stein & Ernesto Talvi & Alejandro Grisanti, 1998. "Institutional Arrangements and Fiscal Performance: The Latin American Experience," IDB Publications 6435, Inter-American Development Bank.
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    7. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
    8. Alex Cukierman & Sebastian Edwards & Guido Tabellini, 1989. "Seigniorage and Political Instability," NBER Working Papers 3199, National Bureau of Economic Research, Inc.
    9. V. V. Chari & Patrick J Kehoe, 1998. "Sustainable Plans," Levine's Working Paper Archive 600, David K. Levine.
    10. Mariano Tommasi & Mark P. Jones & Pablo Sanguinetti, 1997. "Politics, Institutions, and Fiscal Performance in the Argentine Provinces," Working Papers 16, Universidad de San Andres, Departamento de Economia, revised Apr 2000.
    11. Ricardo Hausmann & Alberto Alesina & Rudolf Hommes & Ernesto H. Stein, 1998. "Budget Institutions and Fiscal Performance in Latin America," Research Department Publications 4160, Inter-American Development Bank, Research Department.
    12. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
    13. Edwards, Sebastian & Tabellini, Guido, 1991. "Explaining fiscal policies and inflation in developing countries," Journal of International Money and Finance, Elsevier, vol. 10(1, Supple), pages S16-S48, March.
    14. Buiter, Willem H & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers 750, C.E.P.R. Discussion Papers.
    15. Carlos E. Zarazaga, 1993. "Hyperinflations and moral hazard in the appropriation of seigniorage," Working Papers 93-26, Federal Reserve Bank of Philadelphia.
    16. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
    17. Roubini, Nouriel, 1991. "Economic and political determinants of budget deficits in developing countries," Journal of International Money and Finance, Elsevier, vol. 10(1, Supple), pages S49-S72, March.
    18. Tornell, Aaron & Velasco, Andres, 1995. "Money-Based Versus Exchange Rate-Based Stabilization with Endogenous Fiscal Policy," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-21, C.V. Starr Center for Applied Economics, New York University.
    19. Bizer, David S. & Durlauf, Steven N., 1990. "Testing the positive theory of government finance," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 123-141, August.
    20. Aizenman, Joshua, 1992. "Competitive Externalities and the Optimal Seigniorage," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 24(1), pages 61-71, February.
    21. V.V. Chari & Harold Cole, 1993. "A contribution to the theory of pork barrel spending," Staff Report, Federal Reserve Bank of Minneapolis 156, Federal Reserve Bank of Minneapolis.
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    Cited by:
    1. Buchanan, James M. & Yoon, Yong J., 2004. "Majoritarian exploitation of the fiscal commons: general taxes-differential transfers," European Journal of Political Economy, Elsevier, vol. 20(1), pages 73-90, March.
    2. Sell, Friedrich L., 2003. "Die Stabilitätsprogramme der EU: Anspruch und Wirklichkeit in den ersten vier Jahren der Europäischen Währungsunion," Working Papers in Economics 2003,2, Universität der Bundeswehr München, Economic Research Group.
    3. Bernardo Bortolotti & Paolo Pinotti, 2008. "Delayed privatization," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 663, Bank of Italy, Economic Research and International Relations Area.
    4. Juan Carlos Echeverry & Jorge Alexander Bonilla & Andrés Moya, 2006. "Rigideces Institucionales y Flexibilidad Presupuestaria: Origen, Motivación y Efectos sobre el Presupuesto," IDB Publications 9091, Inter-American Development Bank.
    5. Charles R. Hankla, 2013. "Fragmented Legislatures and the Budget: Analyzing Presidential Democracies," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 25(2), pages 200-228, 07.

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