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Why are Stabilizations Delayed

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  • Alesina, Alberto
  • Drazen, Allan

Abstract

When a stabilization has significant distributional implications (as in the case of tax increases to'eliminate a large budget deficit) different socio—economic groups with conflicting distributional objectives may attempt to shift the burden of stabilization onto other groups. The process leading to a stabilization becomes.a "war of attrition", with each group finding it rational to attempt to wait the others out, and stabilization occurring only when one group concedes and is forced to bear a disproportionate share of the burden of fiscal adjustment. We solve for the expected time of stabilization in a model of "rational" delay based on a war of attrition and present comparative statics results relating the expected time of stabilization to several political and economic variables. We motivate this 'approach and its results by comparison to historical and current episodes.

Suggested Citation

  • Alesina, Alberto & Drazen, Allan, 1991. "Why are Stabilizations Delayed," Foerder Institute for Economic Research Working Papers 275509, Tel-Aviv University > Foerder Institute for Economic Research.
  • Handle: RePEc:ags:isfiwp:275509
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    File URL: http://ageconsearch.umn.edu/record/275509/files/TEL-AVIV-FSWP-179.pdf
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    References listed on IDEAS

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    1. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855.
    2. Raquel Fernandez & Dani Rodrik, 1990. "Why is Trade Reform so Unpopular? On Status Quo Bias in Policy Reforms," Boston University - Institute for Economic Development 8, Boston University, Institute for Economic Development.
    3. Thomas J. Sargent, 1982. "The Ends of Four Big Inflations," NBER Chapters,in: Inflation: Causes and Effects, pages 41-98 National Bureau of Economic Research, Inc.
    4. Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping hyperinflations past and present," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 122(1), pages 1-47, March.
    5. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
    6. Rodrik, Dani, 1989. "Promises, Promises: Credible Policy Reform via Signalling," Economic Journal, Royal Economic Society, vol. 99(397), pages 756-772, September.
    7. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management under Uncertainty," NBER Working Papers 2268, National Bureau of Economic Research, Inc.
    8. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
    9. Fernández, Raquel & Rodrik, Dani, 1990. "Why is Trade Reform So Unpopular?," CEPR Discussion Papers 391, C.E.P.R. Discussion Papers.
    10. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-538, June.
    11. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
    12. Alesina, Alberto & Tabellini, Guido, 1989. "External debt, capital flight and political risk," Journal of International Economics, Elsevier, vol. 27(3-4), pages 199-220, November.
    13. Bliss, Christopher & Nalebuff, Barry, 1984. "Dragon-slaying and ballroom dancing: The private supply of a public good," Journal of Public Economics, Elsevier, vol. 25(1-2), pages 1-12, November.
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    Keywords

    Financial Economics;

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