Why Are Stabilizations Delayed?
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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| Length: | 44 pages |
| Date of creation: | 1991 |
| 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 Web page: http://econ.tau.ac.il/ Email: More information through EDIRC
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barro, Robert J., 1986.
"Reputation in a model of monetary policy with incomplete information,"
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- Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855. Full references (including those not matched with items on IDEAS)
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