IDEAS home Printed from https://ideas.repec.org/a/eee/jpolmo/v41y2019i5p943-962.html
   My bibliography  Save this article

Policy inertia, self-defeating expectations and structural reforms: can policy modeling cope?

Author

Listed:
  • Bonatti, Luigi
  • Fracasso, Andrea

Abstract

This paper tackles the relationship between structural reforms, policy inertia and agents’ expectations. By means of a stylized small-open economy encompassing barriers to entry in the non-tradable sector and political constraints’ associated with the risk of political instability in a context of heterogeneous agents (rentiers and non-rentiers), we show that alternative situations may materialize. One can have rational expectations equilibria where structural reforms are undertaken when expected (or not implemented when not expected), but also situations where agents’ expectations cannot be fulfilled. Thus, we maintain that economic models should take the possibility of self-defeating expectations into account for policymakers to exercise informed judgement, in particular about structural reforms. Some recent episodes in the euro area are discussed in the light of our model.

Suggested Citation

  • Bonatti, Luigi & Fracasso, Andrea, 2019. "Policy inertia, self-defeating expectations and structural reforms: can policy modeling cope?," Journal of Policy Modeling, Elsevier, vol. 41(5), pages 943-962.
  • Handle: RePEc:eee:jpolmo:v:41:y:2019:i:5:p:943-962
    DOI: 10.1016/j.jpolmod.2019.04.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0161893819300584
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Agnello, Luca & Castro, Vitor & Jalles, João Tovar & Sousa, Ricardo M., 2015. "What determines the likelihood of structural reforms?," European Journal of Political Economy, Elsevier, vol. 37(C), pages 129-145.
    2. Jesús Fernández-Villaverde & Luis Garicano & Tano Santos, 2013. "Political Credit Cycles: The Case of the Eurozone," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 145-166, Summer.
    3. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 1-37.
    4. Cason, Timothy N. & Mui, Vai-Lam, 2005. "Uncertainty and resistance to reform in laboratory participation games," European Journal of Political Economy, Elsevier, vol. 21(3), pages 708-737, September.
    5. Alberto Alesina & Silvia Ardagna & Giuseppe Nicoletti & Fabio Schiantarelli, 2005. "Regulation And Investment," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 791-825, June.
    6. Gilles Saint-Paul & Samuel Bentolila, 2000. "Will EMU Increase Eurosclerosis?," Working Papers wp2000_0004, CEMFI.
    7. Chang, Roberto, 2001. "Commitment, coordination failures, and delayed reforms," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 123-144, February.
    8. Levon Barseghyan, 2008. "Entry costs and cross-country differences in productivity and output," Journal of Economic Growth, Springer, vol. 13(2), pages 145-167, June.
    9. D. Rodrik., 2015. "When Ideas Trump Interests: Preferences, Worldviews, and Policy Innovations," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
    10. Rubinchik, Anna & Wang, Ruqu, 2008. "A note on redistributive fairness and economic reform," Journal of Development Economics, Elsevier, vol. 86(2), pages 447-452, June.
    11. Jain, Sanjay & Majumdar, Sumon & Mukand, Sharun W, 2014. "Walk the line: Conflict, state capacity and the political dynamics of reform," Journal of Development Economics, Elsevier, vol. 111(C), pages 150-166.
    12. Emilio Fernández Corugedo & Esther Perez Ruiz, 2014. "The EU Services Directive; Gains from Further Liberalization," IMF Working Papers 14/113, International Monetary Fund.
    13. Per Krusell & José-Víctor Ríos-Rull, 1996. "Vested Interests in a Positive Theory of Stagnation and Growth," Review of Economic Studies, Oxford University Press, vol. 63(2), pages 301-329.
    14. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    15. Daron Acemoglu & Simon Johnson & Pablo Querubin & James A. Robinson, 2008. "When Does Policy Reform Work? The Case of Central Bank Independence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(1 (Spring), pages 351-429.
    16. Raúl Labán & Federico Sturzenegger, 1994. "Distributional Conflict, Financial Adaptation And Delayed Stabilizations," Economics and Politics, Wiley Blackwell, vol. 6(3), pages 257-276, November.
    17. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who Adjusts and When?The Political Economy of Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1-1.
    18. Drazen, Allan & Grilli, Vittorio, 1993. "The Benefit of Crises for Economic Reforms," American Economic Review, American Economic Association, vol. 83(3), pages 598-607, June.
    19. Jennings, Colin, 2011. "The good, the bad and the populist: A model of political agency with emotional voters," European Journal of Political Economy, Elsevier, vol. 27(4), pages 611-624.
    20. François Bourguignon, 2011. "Status Quo In The Welfare Analysis Of Tax Reforms," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57(4), pages 603-621, December.
    21. Kuran, Timur, 1987. "Preference Falsification, Policy Continuity and Collective Conservatism," Economic Journal, Royal Economic Society, vol. 97(387), pages 642-665, September.
    22. Miller, Marcus & Sutherland, Alan, 1991. "The "Walters Critique" of the EMS--A Case of Inconsistent Expectations?," The Manchester School of Economic & Social Studies, University of Manchester, vol. 59(0), pages 23-37, Supplemen.
    23. Jens Høj & Vincenzo Galasso & Giuseppe Nicoletti & Thai-Thanh Dang, 2006. "The Political Economy of Structural Reform: Empirical Evidence from OECD Countries," OECD Economics Department Working Papers 501, OECD Publishing.
    24. Micael Castanheira De Moura & Tito Boeri & Ricardo Faini & Vincenzo Galasso, 2006. "Structural reforms without prejudice," ULB Institutional Repository 2013/10017, ULB -- Universite Libre de Bruxelles.
    25. Lora, Eduardo & Olivera, Mauricio, 2004. "What makes reforms likely: Political economy determinants of reforms in Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 7(1), pages 1-37, May.
    26. Anderson, Derek & Hunt, Benjamin & Snudden, Stephen, 2014. "Fiscal consolidation in the euro area: How much pain can structural reforms ease?," Journal of Policy Modeling, Elsevier, vol. 36(5), pages 785-799.
    27. Fabiano Schivardi & Eliana Viviano, 2011. "Entry Barriers in Retail Trade," Economic Journal, Royal Economic Society, vol. 121(551), pages 145-170, March.
    28. Fidrmuc, Jan, 2000. "Political support for reforms: Economics of voting in transition countries," European Economic Review, Elsevier, vol. 44(8), pages 1491-1513, August.
    29. Annicchiarico, Barbara & Di Dio, Fabio & Felici, Francesco, 2013. "Structural reforms and the potential effects on the Italian economy," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 88-109.
    30. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2006. "Entry regulation as a barrier to entrepreneurship," Journal of Financial Economics, Elsevier, vol. 82(3), pages 591-629, December.
    31. Acemoglu, Daron & Robinson, James A & Verdier, Thierry, 2012. "Can't We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World," CEPR Discussion Papers 9113, C.E.P.R. Discussion Papers.
    32. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
    33. Forni, L. & Gerali, A. & Pisani, M., 2010. "Macroeconomic Effects Of Greater Competition In The Service Sector: The Case Of Italy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(5), pages 677-708, November.
    34. Bean, Charles, 1998. "Monetary Policy under EMU," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 41-53, Autumn.
    35. Ingo Borchert & Batshur Gootiiz & Aaditya Mattoo, 2014. "Policy Barriers to International Trade in Services: Evidence from a New Database," World Bank Economic Review, World Bank Group, vol. 28(1), pages 162-188.
    36. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
    37. repec:hrv:faseco:30747190 is not listed on IDEAS
    38. Andrea Bassanini & Romain Duval, 2009. "Unemployment, institutions, and reform complementarities: re-assessing the aggregate evidence for OECD countries," Oxford Review of Economic Policy, Oxford University Press, vol. 25(1), pages 40-59, Spring.
    39. Bryan Caplan, 2007. "Introduction to The Myth of the Rational Voter: Why Democracies Choose Bad Policies," Introductory Chapters, in: The Myth of the Rational Voter: Why Democracies Choose Bad Policies, Princeton University Press.
    40. 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 1146-1155, December.
    41. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135-135.
    42. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
    43. David Romer, 2003. "Misconceptions and Political Outcomes," Economic Journal, Royal Economic Society, vol. 113(484), pages 1-20, January.
    44. Bryan Caplan, 2002. "Systematically Biased Beliefs About Economics: Robust Evidence of Judgemental Anomalies from the Survey of Americans and Economists on the Economy," Economic Journal, Royal Economic Society, vol. 112(479), pages 433-458, April.
    45. Gerali, Andrea & Locarno, Alberto & Notarpietro, Alessandro & Pisani, Massimiliano, 2018. "The sovereign crisis and Italy’s potential output," Journal of Policy Modeling, Elsevier, vol. 40(2), pages 418-433.
    46. A. V. Chari, 2011. "Identifying the Aggregate Productivity Effects of Entry and Size Restrictions: An Empirical Analysis of License Reform in India," American Economic Journal: Economic Policy, American Economic Association, vol. 3(2), pages 66-96, May.
    47. Laura Valderrama, 2009. "Political Risk Aversion," IMF Working Papers 09/194, International Monetary Fund.
    48. Gérard Roland, 2002. "The Political Economy of Transition," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 29-50, Winter.
    49. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, number 9780198293323.
    50. Boeri, Tito & Castanheira, Micael & Faini, Riccardo & Galasso, Vincenzo (ed.), 2006. "Structural Reforms Without Prejudices," OUP Catalogue, Oxford University Press, number 9780199203628.
    51. Allan Drazen, 1996. "The political economy of delayed reform," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 1(1), pages 25-46.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Policy inertia; Status quo bias; Rational expectations; Indeterminacy; Reforms;

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jpolmo:v:41:y:2019:i:5:p:943-962. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Haili He). General contact details of provider: http://www.elsevier.com/locate/inca/505735 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.