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Optimal Fiscal Policy in an Economy Facing Socio-Political Instability

Author

Listed:
  • Quan Le

    (Claremont Graduate University)

Abstract

We present a model of optimal government policy when policies may exacerbate socio-political instability (SPI). We show that the optimal policy that takes into account SPI transforms a standard concave growth model into a model with both a poverty trap and endogenous growth. The predictions of the model are tested by developing three new measures of SPI for a panel of 58 countries. Estimating the optimal government policy from the model reveals strong support for the theory. In particular, we show via simulations that optimal policy causes the economy to expand on a quasi-balanced growth path, with the level of SPI determining whether growth is positive or negative.

Suggested Citation

  • Quan Le, 2000. "Optimal Fiscal Policy in an Economy Facing Socio-Political Instability," Claremont Colleges Working Papers 2000-60, Claremont Colleges.
  • Handle: RePEc:clm:clmeco:2000-60
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    File URL: http://www.claremontmckenna.edu/rdschool/papers/2000-60.pdf
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    More about this item

    Keywords

    socio-political instability; endogenous growth; public investment; political economy of growth;

    JEL classification:

    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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