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Intertemporal excess burden, bequest motives, and the budget deficit

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  • Derek Hung Chiat Chen
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    Abstract

    The author aims to empirically determine the significant factors that affect the levels of budget deficits of central governments across time and across countries. He empirically tests two prominent theories of budget deficits-the Barro (1979) tax-smoothing approach, and the still-untested theory of negative bequest motives advocated by Cukierman and Meltzer (1989). The author uses econometric techniques including fixed-effects (both country and time) panel regressions spanning 87 countries over the period 1975 to 1992, and the Griliches treatment of missing data. The author finds relatively stronger statistical support for the tax-smoothing approach among developing countries but not in industrial countries. The existence of empirical evidence supporting the theory of negative bequest motives is indeterminate. The author also conducted post-regression analyses to assess the proportion of observed differences in budget deficits the factors were actually able to explain. These reveal that both theories are generally weak in accounting for inter-temporal changes in budget deficit shares for both industrial and developing countries. The theories performed significantly better in accounting for cross-section differences. The author has many contributions to the literature. First, he analyzes the question of what determines the size of central government budget deficits using cross-country time series data leading into the 1990s. Second, he provides empirical tests of the still-untested Cukierman-Meltzer (1989) negative bequest motive theory of budget deficits. By using the panel data, the author attempts to determine the factors that influence not only the inter-temporal differences in budget deficits but also those factors that lead to cross-country differences. Last but not least, he provides some preliminary evidence that poverty reduction is necessary for long-term government budget deficit reduction.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3086.

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    Date of creation: 30 Jun 2003
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    Handle: RePEc:wbk:wbrwps:3086

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    Keywords: Public Sector Economics&Finance; Environmental Economics&Policies; Economic Theory&Research; Banks&Banking Reform; Municipal Financial Management; Public Sector Economics&Finance; Economic Theory&Research; Economic Stabilization; Banks&Banking Reform; National Governance;

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    1. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, Elsevier, vol. 33(5), pages 903-933, May.
    2. Mankiw, N. Gregory, 1987. "The optimal collection of seigniorage : Theory and evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 327-341, September.
    3. Eisner, Robert, 1989. "Budget Deficits: Rhetoric and Reality," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(2), pages 73-93, Spring.
    4. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," World Bank Economic Review, World Bank Group, World Bank Group, vol. 10(3), pages 565-91, September.
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    6. Kelley, Allen C, 1988. "Population Pressures, Saving, and Investment in the Third World: Some Puzzles," Economic Development and Cultural Change, University of Chicago Press, vol. 36(3), pages 449-64, April.
    7. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    8. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 942-63, September.
    9. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    10. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 914-27, October.
    11. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc.
    12. Elmendorf, Douglas W. & Mankiw, N, 1999. "Government Debt," Scholarly Articles 2643866, Harvard University Department of Economics.
    13. Lindert, Peter H., 1996. "What Limits Social Spending?," Explorations in Economic History, Elsevier, Elsevier, vol. 33(1), pages 1-34, January.
    14. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
    15. Vaughn, Karen I & Wagner, Richard E, 1992. "Public Debt Controversies: An Essay in Reconciliation," Kyklos, Wiley Blackwell, Wiley Blackwell, vol. 45(1), pages 37-49.
    16. Joshua Aizenman, 1985. "Inflation, Tariffs and Tax Enforcement Costs," NBER Working Papers 1712, National Bureau of Economic Research, Inc.
    17. Griliches, Zvi, 1986. "Economic data issues," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 3, chapter 25, pages 1465-1514 Elsevier.
    18. Roubini, Nouriel, 1991. "Economic and political determinants of budget deficits in developing countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 10(1, Supple), pages S49-S72, March.
    19. Alex Cukierman & Sebastian Edwards & Guido Tabellini, 1989. "Seigniorage and Political Instability," NBER Working Papers 3199, National Bureau of Economic Research, Inc.
    20. Clingermayer, James C, 1991. " An Intergenerational Transfer Model of State Debt Financing," Public Choice, Springer, Springer, vol. 72(1), pages 13-21, October.
    21. Summers, Robert & Heston, Alan, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(2), pages 327-68, May.
    22. Cukierman, Alex & Meltzer, Allan H, 1989. "A Political Theory of Government Debt and Deficits in a Neo-Ricardian Framework," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 713-32, September.
    23. Kristov, Lorenzo & Lindert, Peter & McClelland, Robert, 1992. "Pressure groups and redistribution," Journal of Public Economics, Elsevier, Elsevier, vol. 48(2), pages 135-163, July.
    24. 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.
    25. Alberto Alesina & Geoffrey Carliner, 1991. "Politics and Economics in the Eighties," NBER Books, National Bureau of Economic Research, Inc, number ales91-1.
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