firm balance sheets and monetary policy transmission the functioning of internal capital markets in financial conglomerates facilitates a novel identification strategy of the balance sheet channel of monetary policy we look at small subsidiary banks that are affiliated with the same holding company but operate in different geographical areas these banks face the same marginal cost of funds due to internal capital markets but face different borrowers as they concentrate their lending with small local businesses exploring cross sectional variation in local economic conditions across these subsidiaries we investigate whether borrower creditworthiness influences the response of bank lending to monetary policy our results are consistent with a demand driven transmission mechanism that works through firm balance sheets and is independent from the bank lending channel

new evidence on the puzzles results from agnostic identification on monetary policy and exchange rates abstract past empirical research on monetary policy in open economies has found evidence of the delayed overshooting puzzle and the forward discount puzzle we revisit the effects of monetary policy on exchange rates by applying uhlig s uhlig h 2005a what are the effects of monetary policy on output results from an agnostic identification procedure journal of monetary economics 52 2 381 419 identification procedure that involves sign restrictions on the impulse responses of selected variables in a first step we leave the response of the exchange rate agnostically open and find sizeable evidence for both puzzles in a second step we additionally rule out the delayed overshooting by construction our results indicate that the forward discount puzzle is robust even without delayed overshooting

corporate credit stock price inflation and economic fluctuations this study analyses the empirical interaction between real corporate credit real income real stock prices the short term interest rate and inflation for the netherlands and the usa the framework is based on a five variable structural vector error correction model which identifies the permanent and temporary shocks within the system erratic shocks in the real amount of corporate credit and in stock prices could potentially have some impact on inflation in the case of the usa and on real output in the netherlands however the structural var analysis also shows that the above mentioned erratic shocks only explain a small proportion of the variation in inflation and economic activity and inflation objective shifts and supply side shocks are much more important determinants for economic fluctuations

political business cycles 40 years after nordhaus the aim of this article is to survey the huge literature that has emerged in the last four decades following nordhaus s rev econ stud 42 2 169 190 1975 publication on political business cycles pbcs i first propose some developments in history of thought to examine the context in which this ground breaking contribution saw the light of the day i also present a simplified version of nordhaus s model to highlight his key results i detail some early critiques of this model and the fields of investigations to which they gave birth i then focus on the institutional context and examine its influence on pbcs the actual research agenda finally i derive some paths for future research

understanding global liquidity abstract we explore the concept of global liquidity based on a factor model estimated using a large set of financial and macroeconomic variables from 24 advanced and emerging market economies we measure global liquidity conditions based on the common global factors in the dynamics of liquidity indicators by imposing theoretically motivated sign restrictions on factor loadings we achieve a structural identification of the factors the results suggest that global liquidity conditions are largely driven by three common factors and can therefore not be summarised by a single indicator these three factors can be identified as global monetary policy global credit supply and global credit demand

comparative economic voting britain france germany italy likelihood of a vote for the incumbent coalition in contrast personal economic circumstances no matter how measured demonstrate nonexistent to weak effects on vote choice overall economic conditions emerge as a relatively important vote determinant when a more properly specified general multi equation model of the vote is estimated economics shows itself to be as powerful as traditional factors used to explain the western european vote in particular economic variables exceed the impact of partisan identification in britain and roughly equal it in germany moreover the economic variables exercise more influence than the social cleavages of class and religion everywhere except italy

the keynesian and political determinants of unbalanced budgets u s fiscal policy from eisenhower to reagan the political business cycle proposition that politicians manipulate fiscal policy for political advantage is largely untested more often than not such manipulation is only assumed to occur on the basis of observed movements in inflation and unemployment and the few direct tests of the manipulation hypothesis are characterized by limited consideration of the full possibilities for political influence inadequate control for nonpolitical stabilization policy and inconsistent results this paper constructs several models of political fiscal policy incorporates them into a simple model of keynesian stabilization policy and tests the combined models using u s budget surplus deficit data from fy54 to fy83 the results provide little support for either the electoral motivation or partisan differences interpretations of the political business cycle the implications of these findings for the political business cycle literature long term economic management and deficit directed proposals for institutional reform are discussed

the transmission of us systemic financial stress evidence for emerging market economies abstract we provide empirical evidence that us systemic financial stress shocks us sfsss are an important driver of economic dynamics and fluctuations in emes applying a structural vector autoregression we analyze the international transmission of us sfsss to eight emes using monthly data from 1999 to 2012 us sfsss are identified as unexpected changes in the financial conditions index of the federal reserve bank of chicago findings indicate that a typical emerging market real economy experiences similar negative effects to those seen in the us real economy in response to us sfsss for international transmission our results emphasize that financial interconnectedness with the us is important relative to trade relations the analyzed cases of latin american economies suggest that indirect linkages are also important for transmitting the negative effects of us sfsss in general us sfsss act as a crucial driver of volatility in the emerging world also at business cycle frequencies

macro financial linkages the role of the institutional framework abstract in this paper we assess the quantitative impact of various financial shocks on the real activity and explicitly address the issue of heterogeneity in the macro financial linkages for that purpose we use var models as well as the local projection method for 18 oecd countries based on quarterly data between 1995 and 2014 we take into account three main dimensions of the institutional framework likely to explain the observed cross country heterogeneity in the propagation of financial shocks the product market regulation the employment protection and the financial structure our main findings indicate that financial shocks have a stronger impact in countries characterized by a higher competition friendly regulatory stance a stronger employment protection and a more market oriented financial structure we also show that the varieties of capitalism described by the particular mix of different institutional arrangements do not play a significant role in shaping the macro financial linkages this result suggests that although considered individually goods labor and financial markets regulations are robustly linked to macroeconomic fluctuations there is no prima facie evidence for superior performance of any given mix of institutional arrangements observed in oecd countries

the risk taking channel of monetary policy in the u s evidence from corporate loan data to study the presence of a risk taking channel in the u s we build a comprehensive data set from the syndicated corporate loan market and measure monetary policy using different measures most notably taylor 1993 and romer and romer 2004 residuals we identify a negative relation between monetary policy rates and bank risk taking especially in the run up to the 2007 financial crisis however this effect is purely supply side driven only when using taylor residuals and an ex ante measure of bank risk taking our results highlight the sensitivity of the potency of the risk taking channel to the measures of monetary policy innovations

do banks affect the level and composition of industrial volatility in theory better access to bank credit can reduce or increase output volatility depending on whether firms are more financially constrained during contractions or expansions this paper finds that the volatility of industrial output is lower in countries with more bank credit most of the reduction in volatility is idiosyncratic which follows from the ability of banks to pool and diversify shocks systematic volatility is reduced less strongly volatility dampening is achieved via countercyclical borrowing at the firm level short term borrowing is less or more negatively correlated with sales and inventories in countries with high levels of bank credit

hierarchy and ecological control in federal budgetary decision making a central issue for fiscal sociology is the articulation between state and society operationally what is required is the embedding of bureaucratic decision making in history this article proposes the concepts of hierarcy and ecological control as one possible bridge between organization theorists and macro sociologists a stochastic process model of federal budgetary decision making within the executive branch is developed and tested using hud program allocation data from the johnson administration the model emphasizes that budgets emerge from the interaction of three levels of organizational decision making each of which is embedded in a distinct cultural context historical application focuses on the impact of the vietnam war on domestic antipoverty and housing programs

what does a financial shock do first international evidence in this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions we focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis we estimate a panel var for 21 advanced economies based on quarterly data between 1985 and 2011 where financial shocks are identified through sign restrictions we find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as gdp and particularly investment but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact the financial development and structure of a given country is found not to matter much for the intensity of the propagation of financial shocks moreover we generally find that these shocks play a role not only in crisis times but also in normal conditions finally we discuss the implications of our findings for monetary policy fabio fornari and livio stracca

how do us credit supply shocks propagate internationally a gvar approach abstract we study how us credit supply shocks are transmitted to other economies we use the recently developed gvar approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983 2009 we experiment with inter country links based on bilateral trade portfolio investment foreign direct investment and banking exposures capturing both bilateral trade and financial exposures in a gvar fits the data better than using trade weights only we use sign restrictions on the short run impulse responses in the us model to identify the credit supply shocks we find that negative credit supply shocks have strong negative effects on us and foreign gdp credit and equity markets in several countries respond clearly to the shocks exchange rate responses are consistent with a flight to quality to the us dollar the credit supply shocks explain about a fifth of one year ahead output forecast error variance in the us and about a tenth in the euro area and the uk but considerably less elsewhere

interest rates and bank risk taking abstract a recent line of research views the low interest rate environment of the early to mid 2000s as an element that triggered increased risk taking appetite of banks in search for yield this paper uses approximately 18000 annual observations on euro area banks over the period 2001 2008 and presents strong empirical evidence that low interest rates indeed increase bank risk taking substantially this result is robust across a number of different specifications that account inter alia for the potential endogeneity of interest rates and or the dynamics of bank risk notably among the banks of the large euro area countries this effect is less pronounced for french institutions which held on average a relatively low level of risk assets finally the distributional effects of interest rates on bank risk taking due to individual bank characteristics reveal that the impact of interest rates on risk assets is diminished for banks with higher equity capital and is amplified for banks with higher off balance sheet items

real interest rates leverage and bank risk taking do low interest rate environments lead to greater bank risk taking we show that when banks can adjust their capital structures reductions in real interest rates lead to greater leverage and higher risk for any downward sloping loan demand function however if the capital structure is fixed the effect depends on the degree of leverage following a decrease in interest rates well capitalized banks increase risk while highly levered banks may decrease it if loan demand is linear or concave further the capitalization cutoff depends on the degree of bank competition this effect therefore should vary across countries and over time

international spillovers from euro area and us credit and demand shocks a focus on emerging europe abstract in this paper we examine the international effects of contractions in loan supply loan demand and aggregate demand in the euro area and the usa all three shocks have been at the forefront in spreading stress during the period of the global financial crisis and in particular so to countries that are strongly integrated with the euro area we find that these shocks decrease international output and total credit to a varying degree loan demand and aggregate demand shocks in the euro area trigger significant negative spillovers on output in most other regions evidence for global negative output effects of euro area loan supply shocks is fraught with considerable estimation uncertainty when these three types of shocks emanate from the usa we find significant negative spillovers on output also for loan supply shocks in general international effects on total credit are an order of magnitude larger than those on output with again more evidence that is significant for us than euro area shocks last and taking a regional stance our results indicate that economies from emerging europe are most vulnerable to all shocks considered through their strong economic integration with the euro area these economies are likewise exposed to euro area and us shocks and spillover effects are often larger than the domestic response in the country of shock origin

the unconventional monetary policy of the european central bank effectiveness and transmission analysis since the beginning of the financial crisis in summer 2007 the european central bank ecb has redirected traditional monetary policy based on interest rates to an unconventional monetary policy focused on the quantitative expansion of its balance sheet in this context the present paper aims to assess the effectiveness of unconventional monetary policy instruments with regard to inflation and economic growth to this end the methodology is based on the estimation of a structural vector autoregressive model for the period 2007 q1 2018 q4 using four variables eonia the total amount of assets on the ecb s balance sheet the eurozone inflation rate and the eurozone economic growth rate the results show a slight impact of the different balance sheet policies on inflation and economic activity behaviour especially during the last year of the financial crisis the robustness of these results is supported by the estimation of the same model replacing eonia rates with shadow rates therefore the results support the existence of monetary transmission for the period during which the unconventional monetary policy was developed as well as the effectiveness of the monetary policy adopted by the ecb in its commitment to price stability

financial intermediaries instability and euro area macroeconomic dynamics abstract fitting a markov switching structural vector autoregression to euro area data we show that after taking into account heteroskedasticity the differences in the behavior of the economy between tranquil and financial distress periods e g great recession and sovereign debt crisis reflect variations in the transmission mechanism when and only when a period of financial distress occurs disruptions in financial intermediation trigger adverse effects for the real economy and turn out to be the primary source of business cycle fluctuations finally we provide strong evidence that ecb interventions in the financial sector had beneficial effects on the real economy during the sovereign debt crisis

financial supervision regimes and bank efficiency international evidence abstract there exists a lively debate as for the appropriate architecture of the financial supervision regime with a long list of theoretical advantages and disadvantages associated with each one of its key dimensions the present study investigates whether and how bank profit efficiency is influenced by the central bank s involvement in financial supervision the unification of financial authorities and the independence of the central bank the results show that efficiency decreases as the number of the financial sectors that are supervised by the central bank increases additionally banks operating in countries with greater unification of supervisory authorities are less profit efficient finally central bank independence has a negative impact on bank profit efficiency

the macroeconomic impact of financial fragmentation in the euro area which role for credit supply this paper studies the macroeconomic impact of financial fragmentation in the euro area by analysing the role of credit supply shocks during the recent pre crisis bust and post crisis periods we estimate a time varying parameter vector autoregression tvp var with stochastic volatility a la primiceri 2005 for euro area countries and we identify the structural shocks by imposing sign restrictions on impulse response functions based on the theoretical model by gerali et al 2010 the results suggest that credit supply shocks have been an important driver of business cycle fluctuations in euro area countries and that their effects on the economy have generally increased since the recent crisis more specifically we find evidence that credit supply shocks contributed positively to output growth during the pre crisis period and negatively during the downturn in economic activity in 2008 2009 in all the countries considered in the post crisis period by contrast we observe a strong rise in cross country heterogeneity reflecting financial fragmentation in the euro area associated with the sovereign debt crisis and weaker banks balance sheets although this heterogeneity across euro area countries started to decline around 2012 the contribution of credit supply shocks to gdp growth and credit growth remained negative in most euro area countries in mid 2013 the end of our sample suggesting that constraints in the supply of credit continued to weaken economic activity

macroeconomic factors and microlevel bank behavior we analyze the link between banks and the macroeconomy using a model that extends a macroeconomic var for the u s with a set of factors summarizing conditions in about 1 500 commercial banks we investigate how macroeconomic shocks are transmitted to individual banks and obtain the following main findings backward looking risk of a representative bank declines and bank lending increases following expansionary shocks forward looking risk increases following an expansionary monetary policy shock there is however substantial heterogeneity in the transmission of macroeconomic shocks which is due to bank size capitalization liquidity risk and the exposure to real estate and consumer loans

the political policy cycle presidential effort vs presidential control after disentangling presidential budget proposals from budgetary changes attributable to fluctuations in the economy and to congressional action we find consistent evidence for a presidential macroeconomic policy cycle attuned to the elctoral cycle proposed budgets are more expansionary in election years than at other times the congress however also plays a significant role in determining fiscal outcomes its budgets are systematically related to those of the president and in general reinforce presidential efforts to respond to the electoral cycle

bank regulation risk and return evidence from the credit and sovereign debt crises in this paper we analyze whether regulation reduced risk during the credit crisis and the sovereign debt crisis for a cross section of global banks in this regard we examine distance to default laeven and levine 2008 systemic risk acharya et al 2010 idiosyncratic risk and systematic risk we employ world bank survey data on regulations to test our conjectures we find that regulatory restrictions official supervisory power capital stringency along with private monitoring can explain bank risk in both crises additionally we find that deposit insurance schemes enhance moral hazard as this encouraged banks to take on more risk and perform poorly during the sovereign debt crisis finally official supervision and private monitoring explains the returns during both crisis periods

identifying the macroeconomic effect of loan supply shocks the inability to clearly distinguish the effects of shocks to loan supply from those to loan demand has made it difficult to quantify the economic importance of the credit channel in the transmission mechanism of monetary policy this study provides an innovative approach to identifying loan supply shocks three different results confirm that loan supply shocks have been successfully isolated from shifts in loan demand our measure is particularly important for explaining inventory movements the component of gdp most dependent on bank lending the effect is present even during periods with strong loan demand and the effect remains even when the unpredictable part of the loan supply shock is isolated this identification enables us to show that loan supply shocks have had economically important effects on the u s economy

procyclical leverage and value at risk the availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries empirically we find that intermediary leverage is negatively aligned with the banks value at risk var motivated by the evidence we explore a contracting model that captures the observed features under general conditions on the outcome distribution given by extreme value theory evt intermediaries maintain a constant probability of default to shifts in the outcome distribution implying substantial deleveraging during downturns for some parameter values we can solve the model explicitly thereby endogenizing the var threshold probability from the contracting problem

a new view of political accountability for economic performance most political support models imply that in evaluating economic performance voters use a standard that would provide poor predictions of the future and leave the economy vulnerable to manipulation by vote hungry politicians drawing on macroeconomic theory we develop a simple standard of evaluation which encompasses a concern not only for current economic outcomes but also for accurately assessed future consequences of current policies we find that political support for the president can be explained as well by models that assume that voters use this sophisticated standard as by models that assume voter naivete our analysis questions the wisdom of measures typically used to assess voter evaluation of economic performance in a variety of theoretical contexts the results also help to explain the absence of convincing evidence that governments exploit voter ignorance in manipulating the economy

information or regulation what drives the international activities of commercial banks information costs and regulatory barriers distinguish international financial markets from national ones using panel data on bilateral assets and liabilities of commercial banks i empirically determine the impact of information costs and regulations and i isolate intra eu financial linkages i confirm that information costs and regulations are important factors influencing international asset choices of banks but their relative importance differs among countries

influences on executive and congressional budgetary priorities 1955 1981 a reduced form equation system is used to analyze the influence of economic political and institutional influences on the budgetary priorities of the executive branch and congress during fiscal 1955 81 three related issues are considered the extent to which political and macroeconomic factors affect priorities the degree of interdependence among the components of the federal budget and between spending and revenues and differences between the executive branch and congress with respect to these issues both types of interdependence are present within both executive branch and congressional budgeting although this interdependence is stronger within the executive branch the influence of economic conditions on budgetary outcomes is strong but varies considerably across spending categories there is no evidence of apolitical business cycle political variables exert a modest influence on the budgetary outcomes examined differences between democratic and republican budgetary policies as well as differences in the budgetary priorities of different presidential administrations are small by comparison with the differences between executive and congressional policies

identifying the balance sheet and the lending channels of monetary transmission a loan level analysis abstract we make a novel attempt at comparing the strength of the lending and balance sheet channels of monetary transmission to make this comparison we use loan level data to determine how borrower balance sheets and bank liquidity are related to bank lending decisions and how monetary policy can affect these relationships the key innovation in this paper is the use of loan level data this enables us to measure the independent effects of the two channels and directly account for borrower balance sheets and lender liquidity instead of using proxies our results show that the balance sheet channel is the main mechanism through which monetary policy shocks are transmitted to the economy and that the lending channel does not play a significant role

the role of regulatory arbitrage in u s banks international lending flows bank level evidence this paper examines how cross border differences in the stringency of bank regulations affect u s banks international activities the analysis relies on a unique bank level dataset on the globally most active u s banks balance sheet as well as their cross border foreign affiliate lending and foreign market entry choices in 82 foreign countries in the 2003 2013 period results show that u s banks are significantly more likely to enter foreign markets with relatively laxer bank capital and disclosure requirements and exit foreign markets with relatively stricter deposit insurance schemes and more restrictions on activities banks substitute away from foreign affiliate lending via subsidiaries in the foreign country towards cross border lending originating from the u s in foreign countries with more powerful and independent bank regulators and limits on activities

leaning against windy bank lending using a dynamic stochastic general equilibrium model with banking this paper first provides evidence that during the great moderation monetary policy leaned against the wind blowing from the loan market in the us it then shows that the extent to which this occurred delivers a small welfare loss relative to the optimised simple interest rate rule that features only a response to inflation the source of business cycle fluctuations is crucial for the optimality of a leaning against the wind policy in fact the pro cyclical nature of lending creates a trade o between inflation and financial stabilisation when supply shocks are prevalent

relationship lending hierarchical distance and credit tightening evidence from the financial crisis abstract this paper examines the firms credit availability during the 2007 2009 financial crisis using a dataset of 5331 bank firm relationships provided by borrowers credit folders of three italian banks it aims to test whether a strong lender borrower relationship can produce less credit rationing for borrowing firms even during a credit crunch period the results show that exclusivity of the relationship can mitigate the firm credit rationing we also verify the influence of lending organizational structure during crisis a new measure of distance in lending technologies has been introduced the hierarchical distance calculated as the distance between the branch that originates the loan and the location of the hierarchical level responsible for financing decision our findings document a negative impact of distance on credit availability consistent with the idea that proximity facilitates the transmission of soft information

cross country effects of regulatory capital arbitrage abstract one reason for the recent asset price bubbles in many developed countries could be regulatory capital arbitrage regulatory and legal changes can help traditional banks to move their assets off their balance sheets into the lightly regulated shadows and thus enable regulatory arbitrage through the securitized sector this paper adopts a global vector autoregression gvar methodology to assess the effects of regulatory capital arbitrage on equity prices house prices and economic activity across 11 oecd countries regions a counterfactual experiment disentangles the effects of regulatory arbitrage following a change in the net capital rule for investment banks in april 2004 and the adoption of the basel ii accord in june 2004 the results provide evidence for the existence of an international finance multiplier with about half of the countries overshooting u s impulse responses the counterfactual shows that regulatory arbitrage via the u s securitized sector may enhance the cross country reallocation of capital from housing markets towards equity markets

public expenditures in canadian provinces an empirical study of politico economic interactions it is widely believed that government ideology and electoral constraints are two major factors that influence the level of public expenditures however frey and schneider argue that the effects of the two phenomena are not simultaneous only when a government is popular can it pursue ideological goals and when popularity is low energies must be redirected toward gaining support from voters to win the next election data draw from the canadian provincial case are used to test empirically this hypothesis the findings support the frey and schneider explanation

explaining presidential priorities the competing aspiration levels model of macrobudgetary decision making this article develops a new statistical model of trade offs among defense nondefense and fiscal policy concerns as they are reflected in the presidential budgetary process the competing aspiration levels model calm builds on crecine s 1971 great identity argument unlike most previous attempts to model presidential budgeting calm explicitly represents the interdependence of decisions about defense nondefense and totalfederal expenditures calm models this interdependence as the result of the interaction of minimal aspirations for defense and nondefense expenditures with a maximum acceptable level of expenditures from a fiscal policy standpoint statistical analyses of presidential budgets for the fiscal years from 1955 through 1980 provide strong support for the calm formulation substantively the results indicate that fiscal constraints on total expenditures have progressively weakened that the maximum acceptable expenditure level has generally exceeded the minimal expenditure aspiration level and that when a potential fiscal surplus has existed the nondefense sector has been more successful in capturing a share of this surplus than the defense sector in keeping with traditional incrementalist arguments the results indicate that previous year expenditure levels provide a relatively secure budgetary base for both the defense and nondefense sectors both sectors tend to receive their minimal aspiration levels plus a share of whatever fiscal surplus exists the analysis also indicates that the executive branch has not been as strong a direct force for budgetary growth as congress

the risk taking channel of monetary policy exploring all avenues the literature on the risk taking channel of monetary policy grew quickly leading to scattered evidence we examine this channel through different angles exploring detailed information on loan origination and performance ex ante riskier borrowers receive more funding at the extensive margin when interest rates are lower ex post performance is independent of the level of interest rates at origination still loans granted in periods of very low and stable interest rates show higher default rates once interest rates start to increase risk taking is stronger among banks with lower capital ratios suggesting that this channel may be linked to managerial incentives for risk shifting

models of military expenditure a brief review of the extensive empirical literature devoted to explaining levels of military expenditure indicates a wide variety of unreconciled results however comparing the alternative models is not straightforward this paper uses british post war military expenditures to illustrate some of the methodological issues involved in model comparison evaluation and selection starting from two published models for the uk a systematic specification search leads to a new model which dominates alternative specifications passes a wide range of misspecification tests and also fits well to french data

following germany s lead using international monetary linkages to estimate the effect of monetary policy on the economy abstract forward looking behavior on the part of the monetary authority makes it difficult to estimate the effect of monetary policy interventions on output we present instrumental variables estimates of the impact of interest rates on quarterly real output for several european countries using german interest rates as the instrument these estimates confirm a strong forward looking bias in least squares estimates that persists even conditional on standard controls for the history of the system due to the potential for correlation of output shocks across countries we interpret our estimates as lower bounds for the effect of monetary policy on real output

business cycle measurement with some theory a method to evaluate cyclical models not requiring knowledge of the dgp and the exact specification of the aggregate decision rules is proposed we derive robust restrictions in a class of models use some to identify structural shocks in the data and others to evaluate the class or contrast sub models the approach has good properties even in small samples and when the class of models is misspecified the method is used to sort out the relevance of a certain friction the presence of rule of thumb consumers in a standard class of models

upsetting national priorities the reagan administration s budgetary strategy we use simulations based on a multiequation model of federal budgetary outcomes to assess the reagan administrations impact on the federal budget during fiscal years 1982 86 reagan s aggregate budget priorities represent a significant departure from the priorities of prior postwar administrations the bulk of this shift in priorities had occurred by fiscal 1984 defense spending and uncontrollable domestic spending were higher and spending on domestic controllable programs lower under reagan than they would otherwise have been the distinctiveness of reagan s budgetary priorities can be attributed to his tax cuts and far from a strategy of starving the budget by reducing revenues to a failure to allow fiscal pressures to restrain spending the model projects that without tax cuts reagan s predecessors would have spent no less on defense than reagan cutting taxes increased the deficit by about 400 billion cumulatively during fiscal years 1982 86 and reduced expenditures by roughly 30 billion

regulatory arbitrage in cross border banking mergers within the eu expanding the cross country footprint of an organization s profit making activities changes the geographic pattern of its exposure to loss in ways that are hard for regulators and supervisors to observe this paper tests and confirms the hypothesis that differences in the size and character of safety net benefits available to banks in individual eu countries help to account for cross border merger activity our results suggest that central bankers need to develop statistical procedures for assessing the consequences of differences in supervisory strength and weakness in partner countries we believe that the methods used here can help in this task

the macroeconomic sources of systemic risk in the banking sectors of five new eu member states abstract rapid credit growth has been one of the most pervasive developments in recent years in central and eastern europe our estimates support the hypothesis that the growth of credit and the amount of available finance might harm banking performance and deteriorate non performing loans npl dynamics most probably due to the overheating of economies in the five nmss the procyclicality of banking sector performance and high economic activities growth is a signal of an economy overheating and therefore a slowdown in economic activity is likely to accelerate the growth of the npl ratio

what caused the early millennium slowdown evidence based on vector autoregressions this paper uses a simple var for the usa and euro area to analyse the underlying shocks of the early millennium slowdown i e supply demand monetary policy and oil price shocks the results of two identification strategies are compared one is based on traditional zero restrictions and as an alternative an identification scheme based on more recent sign restrictions is proposed the main conclusion is that the recent slowdown is caused by a combination of several shocks negative aggregate supply and aggregate spending shocks the increase of oil prices in 1999 and restrictive monetary policy in 2000 these shocks are more pronounced in the usa than the euro area the results are somewhat different depending on the identification strategy it is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks copyright 2005 john wiley sons ltd

an historical decomposition of the great depression to determine the role of money abstract the innovation accounting technique of historical decomposition seems ideally suited as a vehicle for a re examination of money s role during the depression its application using u s monthly data for 1919 to 1941 reveals that innovations in money exerted a considerable influence on prices and output after october 1929 although the depth of the depression and the extent of the subsequent recovery cannot be attributed solely to monetary factors an important albeit occasionally diminished monetary effect is also identified even when a passive contemporaneous response by money to price and output fluctuations is assumed not to contribute to the effect

drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions abstract this paper discusses the problems associated with using information about the signs of certain magnitudes as a basis for drawing structural conclusions in vector autoregressions we also review available tools to solve these problems for illustration we use dahlhaus and vasishtha s 2019 study of the effects of a u s monetary contraction on capital flows to emerging markets we explain why sign restrictions alone are not enough to allow us to answer the question and suggest alternative approaches that could be used

cyclicality of credit supply firm level evidence abstract we quantify fluctuations in bank loan supply in the time series by studying firms substitution between loans and bonds using firm level data any firm that raises new debt must have a positive demand for external funds conditional on the issuance of new debt we interpret firms switching from loans to bonds as a contraction in bank credit supply we find strong evidence of this substitution at times that are characterized by tight lending standards depressed aggregate lending poor bank performance and tight monetary policy we show that this substitution behavior has strong predictive power for bank borrowing and investments by small firms

the political economy of benefits and costs a neoclassical approach to distributive politics this essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions the model emphasizes the economically arbitrary from a welfare point of view importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation we explore the implications of a legislator s objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale

drivers of structural change in cross border banking since the global financial crisis abstract the paper analyzes the effects of changes to regulatory policy and to monetary policy on cross border bank lending since the global financial crisis cross border bank lending has decreased and the home bias in the credit portfolio of banks has risen sharply especially among banks in the euro area our results suggest that expansionary monetary policy in the source countries as measured by the change in reserves held at central banks has encouraged cross border lending both in euro area and non euro area countries regarding regulatory policy increases in financial supervisory power or independencve of the supervisory authorities have encouraged credit outflows from source countries the findings thus underline the importance of regulatory arbitrage as a driver of cross border bank flows since the global financial crisis however in the euro area arbitrage in capital stringency was linked to lower cross border lending since the crisis

level playing fields in international financial regulation we analyze the desirability of level playing fields in international financial regulation in general level playing fields impose the standards of the weakest regulator upon the best regulated economies however they may be desirable when capital is mobile because they counter a cherry picking effect that lowers the size and efficiency of banks in weaker economies hence while a laissez faire policy favors the better regulated economy level playing fields are good for weaker regulators we show that multinational banking mitigates the cherry picking effect and reduces the damage that a level playing field causes in the better regulated economy

loan supply shocks during the financial crisis evidence for the euro area this paper employs a panel vector autoregressive model for the member countries of the euro area to explore the role of banks during the slump of the real economy that followed the financial crisis in particular we seek to quantify the macroeconomic effects of adverse loan supply shocks which are identified using sign restrictions we find that loan supply shocks significantly contributed to the evolution of the loan volume and real gdp growth in all member countries during the financial crisis however concerning both the timing and the magnitude of the shocks our results also indicate that the euro area was characterized by a considerable degree of cross country heterogeneity

the cyclicality of price cost margins in banking an empirical analysis of its determinants i introduction in this paper we study the cyclical behavior of price cost margins in banking calculated as the difference between the interest rate on loans and deposits using time series quarterly data for the period 1979 2005 in the united states this cyclical behavior of banks price cost margins a key fact about business fluctuations has received little attention before dueker and thornton 1997 find evidence that in cyclical downturns banks opt for a relatively high price cost margin however they focus exclusively on the markup of the bank prime lending rate over the marginal cost of funds for banks mandelman 2006 presents evidence on the cyclicality of margins for a large sample of countries and uses foreign bank penetration to explain the behavior of margins 1 in olivero 2005 aliaga diaz 2006 and aliaga diaz and olivero 2010a we document the countercyclicality of banks price cost margins in the united states in that paper we do so using an atheoretical methodology based on var forecast errors to measure comovement between variables 2 in this paper we build on this atheoretical evidence and take a step further by constructing an empirical model of the determinants of the cyclical behavior of margins here we take a theory based approach to decide on the inclusion of the relevant regressors that belong to this model doing so allows us to contribute to the literature by providing potential explanations for the previously documented countercyclical nature of margins monetary policy and credit risk could be suggested as the main and potentially the only determinants of the cyclical behavior of margins on the one hand the bank lending channel of monetary transmission predicts that the federal funds rate as a monetary policy indicator and margins are directly related therefore if policy rates exhibit a particular cyclical behavior not controlling for monetary policy could bias the estimations on the cyclical behavior of margins on the other hand credit risk is expected to be countercyclical and to raise margins so that default should help explain the countercyclicality of the latter based on these two observations our empirical methodology consists of two steps in a first step we test whether the negative and significant contemporaneous sample correlations between margins and a business cycle indicator are robust to the inclusion of controls related to monetary policy default risk and banking regulation results show it is so that there seems to be other channels through which fluctuations in the economy give rise to the observed countercyclicality of margins in a second step we look for these channels and offer several potential explanations for the observed behavior interest rate risk the economy s financial depth banks liquidity and capitalization and the share of total assets held by large banks all exert a significant impact on the behavior of margins over the business cycle these conclusions are consistent across alternative definitions of the margins and the business cycle indicator our work is linked to two strands of research in macroeconomics first our countercyclicality results are linked to the large literature on countercyclical markups in goods markets and its effects on aggregate demand started by rotemberg and saloner 1986 and rotemberg and woodford 1992 second price cost margins that vary endogenously and countercyclically in response to the state of the economy are a necessary condition for the existence of a financial accelerator as an amplifier of business fluctuations see for example bernanke and gertler 1989 and bernanke gertler and gilchrist 1998 therefore the countercyclical nature of price cost margins that we study here provides empirical support to the large body of literature in macroeconomic theory on this financial accelerator with price cost margins in the market for credit being countercyclical credit becomes more expensive in bad times firms may delay investment and production as a result and recessions may be exacerbated

politicians and banks political influences on government owned banks in emerging markets abstract government ownership of banks is very common in countries other than the united states this paper provides cross country bank level empirical evidence about political influences on these banks it shows that government owned banks increase their lending in election years relative to private banks this effect is robust to controlling for country specific macroeconomic and institutional factors as well as bank specific factors the increase in lending is about 11 of a government owned bank s total loan portfolio or about 0 5 of the median country s gdp per election per government owned bank

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

the age of milton friedman between 1980 and 2005 as the world embraced free market policies living standards rose sharply while life expectancy educational attainment and democracy improved and absolute poverty declined is this a coincidence a collection of essays edited by balcerowicz and fischer argues that indeed reliance on free market forces is key to economic growth a book by stiglitz and others disagrees i review and compare the two arguments

credit demand and supply shocks in italy during the great recession in this article we use structural var analysis to disentangle credit demand and supply shocks and their effect on real economic activity in italy during the 2008 to 2014 crisis period the three e

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

collective moral hazard maturity mismatch and systemic bailouts the paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy when everyone engages in maturity transformation authorities haver little choice but facilitating refinancing in turn refusing to adopt a risky balance sheet lowers the return on equity the key ingredient is that monetary policy is non targeted the ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage while the distortion costs are to a large extent fixed this insight has important consequences first banks choose to correlate their risk exposures second private borrowers may deliberately choose to increase their interest rate sensitivity following bad news about future needs for liquidity third optimal monetary policy is time inconsistent fourth macro prudential supervision is called for we characterize the optimal regulation which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets we establish the robustness of our insights when the set of

explaining bank distress in eastern european transition economies abstract this paper considers the joint role of macroeconomic structural and bank specific factors in explaining the occurrence of banking problems in the nineteen eastern european transition countries over the last decade with data at the individual bank level we show using a discrete time survival model that all three factors interact in their impact and have a rich dynamic profile which underlines the highly volatile cycles challenging the stability of banks in this region a fragile funding basis accompanied by high exposure to market risk in an environment of reforms and macroeconomic disturbances is the typical precursor of bank distress

an alternative approach to understanding budgetary trade offs in this paper we criticize existing research on budgetary trade offs on a number of grounds including 1 its focus on only a limited form of trade off behavior 2 its use of a modeling strategy that avoids an explanation of trade off outcomes and likely results in specification error and 3 its generally weak development of the central concept of trade off accordingly we propose an alternative methodology for studying budgetary trade offs we begin by presenting a general taxonomy of trade offs then we analyze when and where the various types of trade offs are likely to occur within the u s federal budget process finally we conduct empirical analysis of two trade off choices in the federal process that between defense and domestic spending and that between transfer spending and consumption unlike previous trade off studies our models assume that trade off outcomes will vary depending on environmental conditions foreign policy factors seem to be the key determinants of the domestic defense trade off outcome while economic conditions appear critical to the choice between transfers and consumption

foreign activities of u s banks since 1997 the roles of regulations and market conditions in crises and normal times abstract using a unique newly constructed dataset on u s banks foreign activities since 1997 this paper examines how bank market and regulatory conditions in the u s and host countries affect u s banks choices of which foreign markets to enter and how much claims and liabilities to take on there using a two stage structural estimation framework the determinants of foreign market entry exit cross border claims and foreign affiliate claims and liabilities choices are examined in 107 host countries around the world it is shown that 1 the health of the balance sheet is the primary driver of foreign market entry exit choices especially so during the subprime crisis while host market and regulatory conditions play important roles in the choice of claims liabilities volumes 2 banks choose their foreign activities during banking and market crises differently than they do in normal times and 3 in addition to bank size previous experience with managing a global lending network significantly increases the intensity of banks foreign involvement structural estimates of the costs of foreign market entry exit and host market regulatory stringency are also derived

bank regulation property prices and early warning systems for banking crises in oecd countries abstract early warning systems ews for banking crises generally omit bank capital bank liquidity and property prices most work on ews has been for global samples dominated by emerging market crises where time series data on bank capital adequacy and property prices are typically absent we estimate logit crisis models for oecd countries finding strong effects from capital adequacy and liquidity ratios as well as property prices and can exclude traditional variables higher capital adequacy and liquidity ratios have a marked effect on the crisis probabilities implying long run benefits to offset some of the costs that such regulations may impose

elections keynes bureaucracy and class explaining u s budget deficits 1961 1978 the determination of u s federal budget deficits and surpluses during a period of keynesian fiscal activism is modeled in light of relevant social science literatures rational choice emphases upon electoral manipulation of the economy and keynesian stabilization marxian emphases upon monopolization andfiscal control of labor militancy organizational decision theory emphases upon budgeting inertia and a number of additional thrusts from other literatures are supported by time series regression analyses of 1961 1978 surpluses deficits the final model is statistically well behaved analysis of so called high employment measures of discretionary surpluses deficits supports all interpretations requiring discretionary policy making but an indication of automatic stabilization emerges as well a focus upon executive policy making roles is suggested as one means to further theoretical integration of explanations of state macroeconomic policy

financial crises and cross border banking new evidence the surge in cross border banking prior to global financial crises took place not only in the interbank market but also in the retail market e g between banks and their private customers abroad we utilize confidential data to estimate for the first time the effects of banking currency and twin crises on the geography of cross border deposits and loans we show that each crisis type has its own specific effects that these effects themselves lead to sustained increases in cross border banking and that they are different for cross border loans and deposits respectively

identification of financial factors in economic fluctuations we estimate demand supply monetary investment and nancial shocks in a var identified with a minimum set of sign restrictions on us data we find that financial shocks are major drivers of fluctuations in output stock prices and investment but have a limited effect on inflation in a second step we disentangle shocks originating in the housing sector shocks originating in credit markets and uncertainty shocks in the extended set upfinancial shocks are even more important and a leading role is played by housing shocks that have large and persistent effects on output

defense expenditures and national well being the existence of a trade off between military expenditures and social spending is widely hypothesized but often difficult to establish empirically this article constructs a model to test the effects of changes in military spending on federal expenditures for health and education from 1941 through 1979 important economic demographic and political changes are controlled no systematic tradeoff between military spending and federal health and education expenditures is found nor in this period was there any significant depressing effect on health and education expenditures by republican presidential administrations thus the current reagan administration under which there are major increases in military spending and major cuts in health and education spending emerges as exceptional

presidential popularity and macroeconomic performance are voters really so naive f ollowing the pioneering work of kramer 1971 numerous studies have analyzed the relationships between the macroeconomic performance of political administrations and their popularity or vote getting ability kramer s work showed that the aggregate congressional vote for an incumbent party can be explained rather well by variables indicating recent economic performance subsequent works have extended kramer s research by explaining presidential vote or gallup poll popularity data with similar models on one point almost all of these studies agree 2 votes and popularity can be explained well by models which suppose that voters judge policymakers on the basis of retrospective evaluation of past macroeconomic outcomes most authors interpret their results as being supportive of the hypothesis of rational voters since the evidence indicates that voting decisions are not based purely upon personalities party affiliation or chance kramer argued that if voters regard past macroeconomic performance of an administration to be indicative of future performance then a concern with past performance indicates a concern for future performance voters who simply extrapolate from the past to predict the future are rather naive however a sophisticated voter who has an understanding of the important intertemporal constraints embodied in the structure of the economy would be able to forecast future consequences of current policy choices more accurately than one who simply extrapolates if votes and popularity are simply functions of past outcomes then voters must either be ignorant of the basic structure of the economy or unconcerned with the future the supposition that voters are so naive might run counter to the intuition of most economists who generally assume individual rationality as a central behavioral postulate nevertheless the empirical results noted above have been accepted by many as evidence that voters do misperceive their own long run interest the implications of the naive voter hypothesis for macroeconomic policymaking are disturbing nordhaus 1975 has developed a model which shows that voter naivete can encourage vote maximizing politicians to induce political business cycles and an inflationary bias there is some but not unanimous empirical support for the existence of politically motivated business cycles and casual empiricism also suggests that politicians themselves believe in the naive voter 3 while studies show that empirical evidence is consistent with the notion that voters are concerned with the recent past the results do not reject a sophisticated voter hypothesis none of the aforementioned studies has tested a model consistent with a sophisticated voter hypothesis i e a model in which voters understand what outcomes are feasible in the long and short runs and are concerned with future as well as current and past economic performance in this paper we develop such a model and estimate it using gallup poll data on presidential popularity results of this model are compared to results from a naive voter model similar to those employed in previous research received for publication february 4 1982 revision accepted for publication july 30 1982 university of south carolina i am grateful for helpful comments provided by ray fair douglas hibbs william keech daniel richards abel l da costa fernandes and an anonymous referee i also wish to thank william keech for providing me with the gallup poll data on presidential approval rates aurel schubert provided excellent research assistance fair 1978a bloom and price 1975 arcelus and meltzer 1975 and pollard 1981 a 1981 b have all estimated models to explain voting while frey and schneider 1978 and hibbs i 982a 1982b have developed models to explain presidential popularity 2 an exception is provided by arcelus and meltzer 1975 3nordhaus 1975 and tufte 1978 have provided evidence of political business cycles for a number of western democracies and frey and schneider 1978 and maloney and smirlock 1981 have estimated policy reaction functions suggesting that the timing of elections affects policymaking see tufte for a discussion of casual empirical evidence indicating that politicians believe that current economic conditions affect electoral outcomes

the regulator s trade off bank supervision vs minimum capital abstract we develop a simple model of banking regulation with two policy instruments minimum capital requirements and the supervision of domestic banks the regulator faces a trade off high capital requirements cause a drop in the banks profitability whereas strict supervision reduces the scope of intermediation and is costly for taxpayers we show that a mix of both instruments minimises the costs of preventing the collapse of financial intermediation once we allow for cross border banking the optimal policy is not feasible if domestic supervisory effort is not observable our model predicts a race to the bottom in capital requirement regulation therefore countries are better off by harmonising regulation on an international standard

is the exchange rate a shock absorber or a source of shocks new empirical evidence this paper analyses the role of the real exchange rate in a structural vector autoregression framework for the united kingdom euro area japan and canada vis a vis the united states a new identification strategy is proposed building on sign restrictions the results are compared to the benchmark conventional approach of clarida and gali 1994 based on longrun zero restrictions although the restrictions are derived from the same theoretical model the results are strikingly different in contrast to the benchmark model an important role for nominal shocks in explaining real exchange rate fluctuations is found hence the exchange rate can rather be considered as a source of shocks instead of a shock absorber

monetary policy and risk taking abstract we assess the effects of monetary policy on bank risk to verify the existence of a risk taking channel monetary expansions inducing banks to assume more risk we first present var evidence confirming that this channel exists and is particularly significant on the bank funding side then to rationalize this evidence we build a macroeconomic model where banks subject to runs endogenously choose their funding structure deposits vs capital and risk level a monetary expansion increases bank leverage and risk in turn higher bank risk in steady state increases asset price volatility and reduces equilibrium output

financial opening deposit insurance and risk in a model of banking competition abstract we study the impact of competition on banks risk taking behavior under different assumptions about deposit insurance and the dissemination of information while financial opening increases banks riskiness a risk based deposit insurance or alternatively the public disclosure of financial information are likely to mitigate this effect moreover the limiting cases of uninsured but fully informed depositors and risk based full deposit insurance yield the same equilibrium risk level although the welfare consequences of increased competition depend on its impact on risk financial opening unambiguously improves welfare as we approach the limiting cases

time variation in macro financial linkages summary we analyze the contribution of credit spread house and stock price shocks to the us economy based on a time varying parameter vector autoregressive model we find that the contribution of financial shocks to gross domestic product growth fluctuates from about 20 in normal times to more than 50 during the great recession the great recession and the subsequent weak recovery can largely be traced back to negative housing shocks housing shocks have become more important for the real economy since the early 2000s and negative housing shocks are more important than positive ones unexpected increases in credit spreads have not been deflationary recently copyright 2016 john wiley sons ltd

capital inflows and asset prices evidence from emerging asia abstract the withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets this paper addresses the response of property prices to an inflow of foreign capital for that purpose we estimate a panel var on a set of asian emerging market economies for which the waves of inflows were particularly pronounced and identify capital inflow shocks based on sign restrictions our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices capital inflow shocks account for roughly twice the portion of overall house price changes they explain in oecd countries we also address cross country differences in the house price responses to shocks which are most likely due to differences in the monetary policy response to capital inflows

the determinants of u s banks international activities abstract this paper develops a model and structural dynamic estimation of bank behavior to map the relationship between u s banks choices of foreign banking activities and bank and foreign market traits this estimation framework is applied to a unique bank level dataset compiled from regulatory sources covering u s banks foreign activities in 83 host markets over the 2003 2013 period bank traits are better able to explain the evolving patterns of foreign banking than host market characteristics after controlling for these traits the post financial crisis period shows a structural shift away from cross border claims towards foreign affiliate activities structural estimates of foreign market entry costs and regulatory attitudes towards risk are derived simulation exercises confirm the strong impact of banks and regulators risk stance on bank profits and portfolio composition

identifying the risk taking channel of monetary transmission and the connection to economic activity abstract i use loan level data from the syndicated loan market in the u s to investigate how monetary policy affects banks sensitivity to risk using loan level data and banks sensitivity to risk enables me to identify the risk taking channel and disentangle it from other monetary channels i show that banks change their behavior toward risk following changes in monetary policy where loose monetary policy reduces banks sensitivity to risk i then provide evidence for the significant contribution of risk taking shocks and changes in banks risk taking behavior to economic outcomes and business cycle fluctuations the paper s primary contribution is in providing new loan level evidence for the existence of the risk taking channel in the u s as well as a possible link between the risk taking channel and business cycle fluctuations

a sequential model of congressional appropriations while the incrementalist and externalist models of budgeting are sometimes viewed as competing interpretations they are not mutually exclusive this research tests a model incorporating both topdown and bottom up features of federal budgeting the sequential model has several features not commonly found in the empirical budgeting literature including 1 treatment of the sequential processes of budgeting 2 use of a budget constraint which incorporates top down budget influences and recognizes the interdependence of agency budgets 3 linkage of appropriations to revenues and the budget deficit and 4 application of the linear expenditure system the sequential model is tested by a set of simultaneous equations which account for a substantial portion of the variance in appropriations at each level of analysis an empirical comparison with a simple incrementalist model indicates that a model including a budget constraint and external economic and political variables provides a superior explanation of federal budgeting the pioneering study on incrementalism in federal budgeting by davis dempster and wildavsky 1966 concluded that budgetary outcomes can be characterized by a simple set of decision rules that are linear and temporally stable incrementalist theory emphasizes the importance of marginal adjustments in the previous year s budgetary base negotiation strategies of the key participants in the budgeting process congressional subcommittees omb political constituencies and the agencies and the overall stability of budgetary outcomes are also important aspects of the incrementalist view despite periodic attacks the incrementalist view and the simple linear decision rules suggested by davis dempster and wildavsky have become the standard by which other interpretations of budgetary processes are measured in a later study davis dempster and wildavsky 1974 pursued some of the shift points and anomalies of budgetary behavior by including a number of political economic and social variables in their original incrementalist models they concluded that the process that generates agency requests is highly internalized and generally little influenced by the outside world they found that in some cases 14 of 53 agencies congressional appropriations were significantly affected by at least one environmental variable but that for the most part agencies live in worlds of their own in this and other empirical studies of budgeting however environmental influences generally have been included on an ad hoc basis rather than being incorporated systematically into a theoretical framework

the illusion of choice defense and welfare in advanced industrial democracies 1948 1978 research on the tendency of governments to trade off welfare spending for defense has generated diverse and often contradictory findings this study attempts to clarify the issue of trade offs by examining expenditure patterns since 1948 for the four major na to allies united states united kingdom federal republic of germany and france when viewed from the perspective of long term trends in shares of outlays trade offs are evident when short term changes in expenditure which are more germane to the potential for one spending category to benefit at the expense of the other are studied no pattern of trade off can be detected a three equation model is estimated to control for the variety of possible determining factors of public resource allocation in none of the four nations does a pattern of trade off emerge except in periods of wartime or postwar reconstruction these findings are consistent with the ability of governments to finance new spending through either increased taxes or larger budget deficits the growing disinclination to use these methods however suggests that the potential for trade offs has perhaps reappeared in the 1980s