Ilzetzki, Ethan (2006): Rent seeing distortions and fiscal procyclicality.
This is the latest version of this item.
Download (411kB) | Preview
Several empirical studies have found that government expenditures are procyclical in developing countries, unlike the countercyclical expenditures observed in high- income countries. We develop a dynamic political economy model to explain this phenomenon. In the model, governments provide public insurance to uninsured households, and Pareto-effcient and time-consistent redistributive policies are countercyclical. The introduction of a political friction, in which alternating governments disagree on the desired redistributive policy, can lead to procyclical transfer policies. In numerical simulations, the model successfully captures the cyclicality of government expenditures,tax revenues, and de�cits observed in the data for both high-income and developing countries. Simulations also allow a quantitative comparison with other common explanations for fiscal procyclicality. We �nd that without the political friction, borrowing constraints and differences in macroeconomic volatility cannot account for the differences in fiscal policy across countries in this setting.
|Item Type:||MPRA Paper|
|Original Title:||Rent seeing distortions and fiscal procyclicality|
|Keywords:||Fiscal Procyclicality, Fiscal Policy in Developing Countries, Political Distortions|
|Subjects:||E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy
D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
|Depositing User:||Ethan Ilzetzki|
|Date Deposited:||10. Dec 2008 05:28|
|Last Modified:||28. Apr 2015 01:54|
 Aiyagari, S. Rao. 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving." The Quarterly Journal of Economics 109(3): 659-84.
 Aiyagari, S. Rao, Albert Marcet, Thomas J. Sargent and Juha Seppälä. 2002. "Optimal Taxation without State Contingent Debt."Journal of Political Economy 110(December): 1220-1254.
 Alesina, Alberto, Filipe Campante and Guido Tabellini. 2008. "Why is Fiscal Policy Often Procyclical?" Journal of the European Economic Association 6(5): 1006-1036.
 Alesina, Alberto, Arnaud Devleeschauwer, William Easterly, Sergio Kurlat and Romain Wacziarg. 2003. "Fractionalization." NBER Working Papers 9411.
 Alesina, Alberto and Guido Tabellini. 1990. "A Positive Theory of Fiscal Deficits and Government Debt." Review of Economic Studies 57(3): 403-14.
 Amador, Manuel. 2003. "A Political Model Sovereign Debt Repayment." Mimeo.
 Arellano, Cristina. 2008. "Default Risk and Income Fluctuations in Emerging Economies." American Economic Review 98(3): 690-712.
 Azzimonti Rezno, Marina. 2005. "On the Dynamic Ineffciency of Governments." Mimeo.
 Azzimonti Rezno, Marina, Marco Battaglini and Stephen Coate. 2008. "On the Case for a Balanced Budget Amendment to the U.S. Constitution." Mimeo.
 Baron, David and John Ferejohn. "Bargaining in Legislatures." American Political Science Review 83: 1181-1206.
 Battaglini, Marco and Stephen Coate. 2008a. "A Dynamic Theory of Public Spending, Taxation and Debt." American Economic Review 90(1).
 Battaglini, Marco and Stephen Coate. 2008b. "Fiscal Policy over the Real Business Cycle: A Positive Theory." Mimeo.
 Beck, Thorsten, George Clarke, Alberto Gro¤, Philip Keefer, and Patrick Walsh. 2001. "New tools in comparative political economy: The Database of Political Institutions." World Bank Economic Review 15(1): 165-176.
 Claessens, Stijn. 2006. "Access to Financial Services: A Review of the Issues and Public Policy Objectives." World Bank Research Observer 21(2): 207-240
 Cooley, Thomas F., and Edward C. Prescott. 1995. "Economic Growth and Business Cycles." in Frontiers of Business Cycle Research edited by Thomas F. Cooley. Princeton, NJ: Princeton University Press.
 Easterly,William and Ross Levine. 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions." The Quarterly Journal of Economics 112(4): 1203-50.
 Eichengreen, Barry and Ashoka Mody. 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?." NBER Working Papers 6408.
 Gavin, Michael and Roberto Perotti. 1997. "Fiscal Policy in Latin America." in NBER Macroeconomics Annual, edited by Ben Bernanke and Julio Rotemberg. Cambridge, MA: MIT Press.
 Greenwood, Jeremy, Zvi Hercowitz and Gregory W. Huffman. 1988. "Investment, Capacity Utilization, and the Real Business Cycle." American Economic Review 78(3): 402-17.
 Heston, Alan, Robert Summers and Bettina Aten. 2002. "Penn World Table Version 6.1." Center for International Comparisons at the University of Pennsylvania (CICUP), October.
 Hussey, Robert and George Tauchen. 1991. "Quadrature Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models." Econometrica. 59(2): 371- 396.
 Ilzetzki, Ethan and Carlos A. Végh. 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?" NBER Working Papers 14191.
 Kaminsky, Graciella, Carmen Reinhart and Carlos A. Végh. 2004. "When It Rains It Pours: Procyclical Capital Flows and Macroeconomic Policies." in NBER Macroeco- nomics Annual, edited by Mark Gertler and Kenneth Rogoff, Cambridge, MA: MIT Press.
 Klein, Paul, Per Krusell and Victor Rios Rull. 2003. "Time-Consistent Public Expenditures." Mimeo.
 Krusell, Per, Burhanettin Kuruscu and Anthony Smith, Jr. 2002. "Equilibrium Welfare and Government Policy with Quasi-geometric Discounting." Journal of Economic Theory, 105(1): 42-72.
 Krusell, Per and Anthony A. Smith, Jr. 2003. "Consumption-Savings Decisions with Quasi-Geometric Discounting." Econometrica 71(1): 365-375.
 Lane, Phillip. 2003. "The Cyclical Behavior of Fiscal Policy: Evidence fromthe OECD." Journal of Public Economics 87: 2661-2675.
 Lindbeck, Assar and Jörgen W. Weibull. 1993. "A Model of Political Equilibrium in a Representative Democracy."Journal of Public Economics 51: 195-209.
 Mendoza, Enrique G. and P. Marcelo Oviedo. 2006. "Fiscal Policy and Macroeconomic Uncertainty in Developing Countries: The Tale of the Tormented Insurer." NBER Working Papers 12586.
 Mendoza, Enrique G. 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations." International Economic Review 36(1): 101-37.
 Riascos, Alvaro and Carlos A. Végh. 2003. "Procyclical Government Spending in Developing Countries: The Role of Capital Market Imperfections." Mimeo.
 Sargent, Thomas J. 1979. " 'Tobin's q' and the Rate of Investment in General Equilibrium." Federal Reserve Bank of Minneapolis Sta¤ Report 40.
 Stokey, Nancy, Robert E. Lucas, Jr. and Edward C. Prescott. 1989. Recursive Methods in Economic Dynamics. Cambridge, MA: Harvard University Press.
 Talvi Ernesto and Carlos A. Vegh. 2005. "Tax Base Variability and Procyclical Fiscal Policy." Journal of Development Economics 78 (October): 156-190.
 Tornell, Aaron and Phillip R. Lane. 1999. "The Voracity Effect." The American Economic Review, 89: 22-46.
Available Versions of this Item
Rent seeing distortions and fiscal procyclicality. (deposited 13. May 2008 01:17)
- Rent seeing distortions and fiscal procyclicality. (deposited 10. Dec 2008 05:28) [Currently Displayed]