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Political models of macroeconomic policy and fiscal reform


  • Alesina, Alberto


The author explains how recent developments in political economics improve our understanding of macroeconomic policy - especially the timing, design, and likelihood of stabilization's success through monetary and fiscal reform. The author reviews the literature on political business cycles and emphasizes several issues involving the relationship between the timing of elections and the timing of macroeconomic policies and outcomes. He also addresses how models can be useful in studying non-democratic systems. Two forces are crucial factors in both democratic and dictatorial systems, although they may manifest themselves differently: (1) the policymakers'incentive to retain power; and (2) society's polarization and the degree of social conflict. The author then analyzes why economic stabilization is delayed, even when it is obvious that sooner or later a stabilization program will have to be adopted. Some points made in the paper follow. Certain institutional characteristics make quick and successful stabilization more or less likely. The more unequal the distribution of stabilization's costs, the more likely that stabilization will be delayed. An increase in the cost of postponing stabilization reduces the delay. Political institutions that make it easier for small interest groups to veto legislation make delay more likely. If political and economic resources are unequally distributed, and it is obvious which group is stronger and has resources to wait longer, a war of attrition ends immediately, as there is no uncertainty about who will win it. Delay is more likely when information about who will bear the cost of delays is uncertain or unevenly distributed. Delay is also more likely when there is agreement about the need for fiscal change but a political stalemate about distribution - about how the burden of higher taxes or spending cuts should be allocated. Stabilization usually occurs when there is political consolidation. The burden of stabilization is sometimes unequal, with the politically weaker group (often the lower classes) bearing a larger burden (often regressive measures). If it is in the interest of the current government to do nothing for fear of failure because of government incompetence, the public may have no incentive to vote for the opposition because the opposition may also do nothing; the crucial factor here is how aware the government is of its own incompetence and thus its reasons for not attempting reform. Successful stabilization usually comes after several failed attempts, and the successful program is often very much like one that failed.

Suggested Citation

  • Alesina, Alberto, 1992. "Political models of macroeconomic policy and fiscal reform," Policy Research Working Paper Series 970, The World Bank.
  • Handle: RePEc:wbk:wbrwps:970

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    1. repec:cup:apsrev:v:71:y:1977:i:04:p:1467-1487_26 is not listed on IDEAS
    2. Alesina, Alberto F & Roubini, Nouriel, 1990. "Political Cycles in OECD Economies," CEPR Discussion Papers 470, C.E.P.R. Discussion Papers.
    3. J. Bradford De Long and Barry Eichengreen., 1991. "The Marshall Plan: History's Most Successful Structural Adjustment Program," Economics Working Papers 91-184, University of California at Berkeley.
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    6. 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.
    7. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922, March.
    8. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    9. Alberto Alesina & Vittorio Grilli, 1991. "The European Central Bank: Reshaping Monetary Politics in Europe," NBER Working Papers 3860, National Bureau of Economic Research, Inc.
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    11. Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," American Economic Review, American Economic Association, vol. 80(1), pages 37-49, March.
    12. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-162, May.
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    14. Alesina, Alberto & Özler, Sule & Roubini, Nouriel & Swagel, Phillip, 1996. "Political Instability and Economic Growth," Journal of Economic Growth, Springer, vol. 1(2), pages 189-211, June.
    15. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
    16. Sebastian Edwards & Guido Tabellini, 1991. "Political Instability, Political Weakness and Inflation: An Empirical Analysis," NBER Working Papers 3721, National Bureau of Economic Research, Inc.
    17. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
    18. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
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    Cited by:

    1. Easterly, William, 2001. "The Middle Class Consensus and Economic Development," Journal of Economic Growth, Springer, vol. 6(4), pages 317-335, December.
    2. Börner, Kira, 2004. "Political Economy Reasons for Government Inertia: The Role of Interest Groups in the Case of Access to Medicines," Discussion Papers in Economics 313, University of Munich, Department of Economics.
    3. Vladimir Mau & Konstantin Yanovskiy, 2002. "Political and Legal Factors of Economic Growth in Russian Regions," Post-Communist Economies, Taylor & Francis Journals, vol. 14(3), pages 321-339.
    4. Boerner, Kira, 2005. "Having Everyone in the Boat May Sink it - Interest Group Involvement and Policy Reforms," Discussion Papers in Economics 730, University of Munich, Department of Economics.
    5. Belke, Ansgar H. & Herz, Bernhard & Vogel, Lukas, 2005. "Structural Reforms and the Exchange Rate Regime: A Panel Analysis for the World versus OECD Countries," IZA Discussion Papers 1798, Institute for the Study of Labor (IZA).
    6. Ball, Richard & Rausser, Gordon, 1995. "Governance structures and the durability of economic reforms: Evidence from inflation stabilizations," World Development, Elsevier, vol. 23(6), pages 897-912, June.
    7. Indra de Soysa & Eric Neumayer, 2005. "Disarming Fears of Diversity: Ethnic Heterogeneity and State Militarization, 1988–2002," Public Economics 0503008, EconWPA, revised 01 Sep 2005.
    8. Inayat Ullah Mangla, 2011. "Reconstructing the Performance of Pakistan’s Political Economy: Another Paradigm," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 30-70, September.
    9. Ansgar Belke & Bernhard Herz & Lukas Vogel, 2006. "Are Monetary Rules and Reforms Complements or Substitutes? A Panel Analysis for the World versus OECD Countries," Working Papers 129, Oesterreichische Nationalbank (Austrian Central Bank).
    10. Alexander Galetovic & Ricardo Sanhueza, 1996. "Citizens, Autocrats, and Plotters: A Model and New Evidence on Coups D'État," Documentos de Trabajo 11, Centro de Economía Aplicada, Universidad de Chile.


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