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Why Are Stabilizations Delayed?

  • Alesina, A.
  • Drazen, A.

When a stabilization has significant distributional implications (as in the case of tax increases to eliminate a large budget deficit) different socio-economic groups will 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. Stabilization occurs 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 also motivate this approach and its results by comparison to historical episodes.

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Paper provided by Tel Aviv - the Sackler Institute of Economic Studies in its series Papers with number 6-91.

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Length: 44 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:fth:teavsa:6-91
Contact details of provider: Postal: Tel-Aviv University, The Sackler Institute of Economic Studies, Ramat Aviv 69 978 Tel-Aviv, Israel
Phone: +972-3-640-9715
Fax: +972-3-640-9908
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  1. 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.
  2. Berg, Andrew & Sachs, Jeffrey, 1988. "The debt crisis structural explanations of country performance," Journal of Development Economics, Elsevier, vol. 29(3), pages 271-306, November.
  3. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 835-55, November.
  4. Dornbusch, Rudiger, 1991. "Credibility and Stabilization," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 837-50, August.
  5. Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc.
  6. Helpman, Elhanan & Leiderman, Leonardo, 1988. "Stabilization in high inflation countries: Analytical foundations and recent experience," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 9-84, January.
  7. Eichengreen, Barry, 1989. "The Capital Levy in Theory and Practice," CEPR Discussion Papers 350, C.E.P.R. Discussion Papers.
  8. 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.
  9. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers 560, Queen's University, Department of Economics.
  10. Tabellini, Guido, 1986. "Money, debt and deficits in a dynamic game," Journal of Economic Dynamics and Control, Elsevier, vol. 10(4), pages 427-442, December.
  11. Robert J. Barro, 1986. "Reputation in a Model of Monetary Policy with Incomplete Information," NBER Working Papers 1794, National Bureau of Economic Research, Inc.
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