Political models of macroeconomic policy and fiscal reform
AbstractThe author explains how recent developments in political economics improve our understanding of macroeconomic policy - especially the timing, design, and likelihood of stabilization's success through monetary and fiscal reform. The author reviews the literature on political business cycles and emphasizes several issues involving the relationship between the timing of elections and the timing of macroeconomic policies and outcomes. He also addresses how models can be useful in studying non-democratic systems. Two forces are crucial factors in both democratic and dictatorial systems, although they may manifest themselves differently: (1) the policymakers'incentive to retain power; and (2) society's polarization and the degree of social conflict. The author then analyzes why economic stabilization is delayed, even when it is obvious that sooner or later a stabilization program will have to be adopted. Some points made in the paper follow. Certain institutional characteristics make quick and successful stabilization more or less likely. The more unequal the distribution of stabilization's costs, the more likely that stabilization will be delayed. An increase in the cost of postponing stabilization reduces the delay. Political institutions that make it easier for small interest groups to veto legislation make delay more likely. If political and economic resources are unequally distributed, and it is obvious which group is stronger and has resources to wait longer, a war of attrition ends immediately, as there is no uncertainty about who will win it. Delay is more likely when information about who will bear the cost of delays is uncertain or unevenly distributed. Delay is also more likely when there is agreement about the need for fiscal change but a political stalemate about distribution - about how the burden of higher taxes or spending cuts should be allocated. Stabilization usually occurs when there is political consolidation. The burden of stabilization is sometimes unequal, with the politically weaker group (often the lower classes) bearing a larger burden (often regressive measures). If it is in the interest of the current government to do nothing for fear of failure because of government incompetence, the public may have no incentive to vote for the opposition because the opposition may also do nothing; the crucial factor here is how aware the government is of its own incompetence and thus its reasons for not attempting reform. Successful stabilization usually comes after several failed attempts, and the successful program is often very much like one that failed.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 970.
Date of creation: 30 Sep 1992
Date of revision:
Environmental Economics&Policies; Economic Theory&Research; National Governance; ICT Policy and Strategies; Health Economics&Finance;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Guido Tabellini & Alberto Alesina, 1988.
"Voting on the Budget Deficit,"
UCLA Economics Working Papers
539, UCLA Department of Economics.
- Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," Scholarly Articles 4553030, Harvard University Department of Economics.
- Alberto Alesina & Guido Tabellini, 1988. "Voting on the Budget Deficit," NBER Working Papers 2759, National Bureau of Economic Research, Inc.
- Alesina, Alberto F & Tabellini, Guido, 1988. "Voting on the Budget Deficit," CEPR Discussion Papers 269, C.E.P.R. Discussion Papers.
- Roubini, Nouriel & Swagel, Phillip & Ozler, Sule & Alesina, Alberto, 1996.
"Political Instability and Economic Growth,"
4553024, Harvard University Department of Economics.
- 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.
- Alesina, Alberto F & Grilli, Vittorio, 1991.
"The European Central Bank: Reshaping Monetary Politics in Europe,"
CEPR Discussion Papers
563, C.E.P.R. Discussion Papers.
- Alberto Alesina & Vittorio Grilli, 1991. "The European Central Bank: Reshaping Monetary Politics in Europe," NBER Working Papers 3860, National Bureau of Economic Research, Inc.
- Alesina, Alberto & Drazen, Allan, 1991.
"Why Are Stabilizations Delayed?,"
American Economic Review,
American Economic Association, vol. 81(5), pages 1170-88, December.
- Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
- Alesina, Alberto, et al, 1996.
" Political Instability and Economic Growth,"
Journal of Economic Growth,
Springer, vol. 1(2), pages 189-211, June.
- J. Bradford De Long and Barry Eichengreen., 1991.
"The Marshall Plan: History's Most Successful Structural Adjustment Program,"
Economics Working Papers
91-184, University of California at Berkeley.
- J. Bradford De Long & Barry Eichengreen, 1993. "The Marshall Plan: History's Most Successful Structural Adjustment Programme," J. Bradford De Long's Working Papers _109, University of California at Berkeley, Economics Department.
- J. Bradford De Long & Barry Eichengreen, 1991. "The Marshall Plan: History's Most Successful Structural Adjustment Program," NBER Working Papers 3899, National Bureau of Economic Research, Inc.
- DeLong, J. Bradford & Eichengreen, Barry, 1991. "The Marshall Plan: History's Most Successful Structural Adjustment Program," Department of Economics, Working Paper Series qt3b1108bj, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- DeLong, J Bradford & Eichengreen, Barry, 1992. "The Marshall Plan: History's Most Successful Structural Adjustment Program," CEPR Discussion Papers 634, C.E.P.R. Discussion Papers.
- Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
- Ozler, Sule & Tabellini, Guido, 1991.
"External Debt and Political Instability,"
CEPR Discussion Papers
582, C.E.P.R. Discussion Papers.
- Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
- Loewy, Michael B, 1988. "Reaganomics and Reputation Revisited," Economic Inquiry, Western Economic Association International, vol. 26(2), pages 253-63, April.
- Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
- Ball, Richard & Rausser, Gordon, 1995.
"Governance structures and the durability of economic reforms: Evidence from inflation stabilizations,"
Elsevier, vol. 23(6), pages 897-912, June.
- Ball, Richard & Rausser, Gordon C, 1993. "Governance structures and the durability of economic reforms: evidence from inflation stabilizations," CUDARE Working Paper Series 648, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
- Ball, Richard & Rausser, Gordon C., 1993. "Governance structures and the durability of economic reforms; evidence from inflation stabilizations," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7qt9r513, Department of Agricultural & Resource Economics, UC Berkeley.
- Ansgar Belke & Bernhard Herz & Lukas Vogel, 2006. "Are Monetary Rules and Reforms Complements or Substitutes? A Panel Analysis for the World versus OECD Countries," Working Papers 129, Oesterreichische Nationalbank (Austrian Central Bank).
- Alexander Galetovic & Ricardo Sanhueza, 1996. "Citizens, Autocrats, and Plotters: A Model and New Evidence on Coups D'État," Documentos de Trabajo 11, Centro de Economía Aplicada, Universidad de Chile.
- Vladimir Mau & Konstantin Yanovskiy, 2002. "Political and Legal Factors of Economic Growth in Russian Regions," Post-Communist Economies, Taylor and Francis Journals, vol. 14(3), pages 321-339.
- Indra de Soysa & Eric Neumayer, 2005.
"Disarming Fears of Diversity: Ethnic Heterogeneity and State Militarization, 1988–2002,"
0503008, EconWPA, revised 01 Sep 2005.
- de Soysa, Indra & Neumayer, Eric, 2007. "Disarming fears of diversity : ethnic heterogeneity and state militarization, 1988-2002," Policy Research Working Paper Series 4221, The World Bank.
- Ansgar Belke & Bernhard Herz & Lukas Vogel, 2005.
"Structural Reforms and the Exchange Rate Regime A Panel Analysis for the World versus OECD Countries,"
Diskussionspapiere aus dem Institut fÃ¼r Volkswirtschaftslehre der UniversitÃ¤t Hohenheim
263/2005, Department of Economics, University of Hohenheim, Germany.
- Belke, Ansgar & Herz, Bernhard & Vogel, Lukas, 2005. "Structural Reforms and the Exchange Rate Regime: A Panel Analysis for the World versus OECD Countries," IZA Discussion Papers 1798, Institute for the Study of Labor (IZA).
- Boerner, Kira, 2005. "Having Everyone in the Boat May Sink it - Interest Group Involvement and Policy Reforms," Discussion Papers in Economics 730, University of Munich, Department of Economics.
- Easterly, William, 2000.
"the middle class consensus and economic development,"
Policy Research Working Paper Series
2346, The World Bank.
- Easterly, William, 2001. " The Middle Class Consensus and Economic Development," Journal of Economic Growth, Springer, vol. 6(4), pages 317-35, December.
- Inayat Ullah Mangla, 2011. "Reconstructing the Performance of Pakistan’s Political Economy: Another Paradigm," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 30-70, September.
- Börner, Kira, 2004. "Political Economy Reasons for Government Inertia: The Role of Interest Groups in the Case of Access to Medicines," Discussion Papers in Economics 313, University of Munich, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.