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Political Myopia, Public Debt, and Economic Growth

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  • Ohad Raveh
  • Yacov Tsur

Abstract

Can economic growth increase public debt? Previous studies on the debt-growth nexus focused on the effects of debt on growth. We present an opposite perspective by showing that growth can reinforce deficit spending. A political economy model of endogenous public debt indicates that the underlying cause is political short-sightedness induced by reelection prospects. Reelection yields accountability but at the same time shortens incumbents’ time horizon, giving rise to political myopia and the ensuing budget deficit bias. Our model shows that economic growth exacerbates this undesirable effect of reelection. We test the model’s predictions using a panel of U.S. states over the period 1963-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous cross-state variation in political time horizon, and aggregate national TFP shocks that are exogenous to individual states. Our more conservative estimates indicate that overa course of five years, a one standard deviation positive TFP shock induces an increase of approximately $494 in real per capita public debt in politically myopic states.

Suggested Citation

  • Ohad Raveh & Yacov Tsur, 2017. "Political Myopia, Public Debt, and Economic Growth," OxCarre Working Papers 200, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:200
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    File URL: https://www.economics.ox.ac.uk/materials/OxCarre/ResearchPapers/oxcarrerp2017200b.pdf
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    Cited by:

    1. Raveh, Ohad & Tsur, Yacov, 2020. "Reelection, growth and public debt," European Journal of Political Economy, Elsevier, vol. 63(C).
    2. Wang, Xue & Bohn, Frank, 2019. "Pension reserve fund, political budget cycles and fiscal illusion," European Journal of Political Economy, Elsevier, vol. 56(C), pages 62-73.
    3. Ohad Raveh & Yacov Tsur, 2018. "Resource Windfalls and Publics Debt: The Role of Political Myopia," OxCarre Working Papers 205, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

    More about this item

    Keywords

    Economic growth; public debt; political myopia; term limits;

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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