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Breaking The Impediments To Budgetary Reforms: Evidence From Europe

  • STEFANIA FABRIZIO
  • ASHOKA MODY

In addition to the known effects of government fractionalization, we find that larger deficits are associated with a reduced likelihood of budgetary reforms. In a war of attrition setting, larger deficits signify stronger entitlements on the budget, generating unwillingness to impose self-discipline. A sense of crisis emerges only when macroeconomic imbalances appear. However, while a crisis creates the opportunity for reform, policy credibility is important for effectively using that opportunity. We find that one way of establishing credibility is by undertaking measures in opposition to the government's known ideological position - these presumably signal motivation by broader social welfare considerations. Copyright 2010 Blackwell Publishing Ltd. International Monetary Fund retains copyright and all other rights in the manuscript of this 〈chapter/article〉 as submitted for publication.

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Article provided by Wiley Blackwell in its journal Economics & Politics.

Volume (Year): 22 (2010)
Issue (Month): 3 (November)
Pages: 362-391

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Handle: RePEc:bla:ecopol:v:22:y:2010:i:3:p:362-391
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  1. Hallerberg, Mark & Strauch, Rolf & von Hagen, Jürgen, 2004. "The design of fiscal rules and forms of governance in European Union countries," Working Paper Series 0419, European Central Bank.
  2. Mark Hallerberg & Jurgen von Hagen, 1997. "Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union," NBER Working Papers 6341, National Bureau of Economic Research, Inc.
  3. Stefania Fabrizio & Ashoka Mody, 2006. "Can budget institutions counteract political indiscipline?," Economic Policy, CEPR;CES;MSH, vol. 21(48), pages 689-739, October.
  4. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
  5. Alesina, Alberto & Hausmann, Ricardo & Hommes, Rudolf & Stein, Ernesto, 1999. "Budget institutions and fiscal performance in Latin America," Journal of Development Economics, Elsevier, vol. 59(2), pages 253-273, August.
  6. Gleich, Holger, 2003. "Budget institutions and fiscal performance in Central and Eastern European countries," Working Paper Series 0215, European Central Bank.
  7. Mariano Tommasi, 1995. "Why Does it Take a Nixon to go to China?," UCLA Economics Working Papers 728, UCLA Department of Economics.
  8. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who adjusts and when? On the political economy of reforms," Harvard Institute of Economic Research Working Papers 2108, Harvard - Institute of Economic Research.
  9. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
  10. Ashoka Mody & Abdul Abiad, 2003. "Financial Reform; What Shakes it? What Shapes it?," IMF Working Papers 03/70, International Monetary Fund.
  11. James M. Poterba, 1993. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
  12. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
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