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The political economy of fiscal policy and inflation in developing countries : an empirical analysis

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  • Edwards, Sebastian
  • Tabellini, Guido

Abstract

Most economists treat fiscal policy as exogenous and consider policymakers as machines to be programmed. Rarely do they seek to determine why, for instance, some countries rely on the inflation tax while others use direct taxation, let alone what political factors affect such decisions. Yet without a theory of how fiscal policymakers behave, at both the revenue and the expenditure levels, there is no guarantee that policy advice will turn out to be sound. The authors present the results of an empirical analysis of the political economy of fiscal policy for a group of developing countries. They look at alternative ways of incorporating political variables into the explanation of government policy actions. Dividing their results into three sections, one each for inflation, budget deficits, and devaluations, they find that: (a) the equilibrium inflation rate is higher the more citizens disagree about which party should hold office, and the more unlikely it is that the government currently in office will be reappointed; (b) political instability and polarization lead to a collective myopia that sometimes tempts policymakers to borrow too heavily and to leave the bills to their successors; and (c) governments tend to implement adjustment policies early in their tenure when they command political authority, but if political conflict arises, they may lack the strength to change the macroeconomic status quo and will resort instead to inflation and deficits.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 703.

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Date of creation: 30 Jun 1991
Date of revision:
Handle: RePEc:wbk:wbrwps:703

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Related research

Keywords: Economic Theory&Research; Economic Stabilization; Public Sector Economics&Finance; Environmental Economics&Policies; National Governance;

References

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  1. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  2. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
  3. Poterba, James M & Rotemberg, Julio J, 1990. "Inflation and Taxation with Optimizing Governments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 1-18, February.
  4. Alex Cukierman & Sebastian Edwards & Guido Tabellini, 1989. "Seigniorage and Political Instability," NBER Working Papers 3199, National Bureau of Economic Research, Inc.
  5. Faig, Miquel, 1988. "Characterization of the optimal tax on money when it functions as a medium of exchange," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 137-148, July.
  6. Mankiw, N. Gregory, 1987. "The optimal collection of seigniorage : Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 327-341, September.
  7. Joshua Aizenman, 1988. "Inflation, Tariffs and Tax Enforcement Costs," NBER Working Papers 1712, National Bureau of Economic Research, Inc.
  8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Citations

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Cited by:
  1. Mary M. Shirley, 1997. "POLICY ARENA: The Economics and Politics of Government Ownership," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(6), pages 849-864.
  2. Aron, Janine & Elbadawi, Ibrahim A., 1992. "Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia," Policy Research Working Paper Series 909, The World Bank.

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