fiscal institutions fiscal policy and sovereign risk premia in emu we investigate the effect of fiscal institutions such as the strength of the finance minister in the budget process and deficits on interest rate spreads of eurozone countries deficits significantly increase risk premia measured by relative swap spreads the effect of deficits is significantly lower under emu this effect partly results from neglecting the role of fiscal institutions after controlling for institutional changes fiscal policy remains a significant determinant of risk premia in emu better institutions are connected with lower risk premia furthermore deficits matter less for risk premia in countries with better institutions markets acknowledge that better institutions reduce fiscal difficulties rendering the monitoring of annual developments less important

bargaining in legislatures bargaining in legislatures is conducted according to formal rules specifying who may make proposals and how they will be decided legislative outcomes depend on those rules and on the structure of the legislature although the social choice literature provides theories about voting equilibria it does not endogenize the formation of the agenda on which the voting is based and rarely takes into account the institutional structure found in legislatures in our theory members of the legislature act noncooperatively in choosing strategies to serve their own districts explicitly taking into account the strategies members adopt in response to the sequential nature of proposal making and voting the model permits the characterization of a legislative equilibrium reflecting the structure of the legislature and also allows consideration of the choice of elements of that structure in a context in which the standard institution free model of social choice theory yields no equilibrium

state government expenditure determinants and tax revenue determinants revisited the primary aim of the research was to test the general hypothesis that many institutional and political variables affect fiscal outcomes that the preferences of public officials and the decision processes used to act on those preferences matter state government data state only not state and local from 1980 1985 and 1990 were used to specify state tax revenue and expenditure models a previous merrifield 1991 state tax revenue model identified many significant institutional and political variables but it was based only on 1985 data 49 observations the larger data set 147 observations including better data for some of the variables indicated that most of merrifield s 1991 findings are robust the state expenditure models facilitated a second test of the general institutional and political variable hypothesis as well as the hypotheses about specific variables the expenditure model also facilitated comparisons of expenditure and tax determinants and comparisons with results published in the literature though there are some noteworthy differences between the expenditure and tax models the expenditure models also supported many of the institutional and political variable hypotheses

public budgetary rules and gdp growth an empirical study on oecd and twelve european countries we study the long term effects of budgetary rules on gdp growth rate and analyse the determinants of the short term gdp growth dynamics for both a sample of 19 oecd and a subsample of 12 european countries we show that in the long run improvements in the cyclically adjusted budget balance as well as increases in the tax burden have negative effects on gdp growth the highest effect of fiscal policy on gdp growth would be obtained if the structural deficits were used to increase the market size by reducing the tax burden in line with barro 1990 a deficit financed reduction of tax burden has a stronger effect for european than for oecd countries because in europe the government size with respect to market size is too large therefore if gdp growth is a dominant policy objective in europe specific actions should redress the 2012 treaty toward a reduction of the tax burden

fiscal transparency political parties and debt in oecd countries abstract many believe and argue that fiscal or budgetary transparency has large positive effects on fiscal performance however the evidence linking transparency and fiscal policy outcomes is less compelling to analyze the effects of fiscal transparency on public debt accumulation we present a career concerns model with political parties this allows us to integrate as implications of a single model three hitherto separate results in the literature on deficit and debt accumulation that transparency decreases debt accumulation at least by reducing an electoral cycle in deficits that right wing governments at least for strategic reasons tend to have higher deficits than left wing governments and that increasing political polarization increases debt accumulation to test the predictions of the model we construct a replicable index of fiscal transparency on 19 country oecd data simultaneous estimates of debt and transparency strongly confirm that a higher degree of fiscal transparency is associated with lower public debt and deficits independent of controls for explanatory variables from other approaches

short term monitoring of fiscal policy discipline under the maastricht treaty and the stability and growth pact sgp european union eu member states commit themselves to avoid excessive deficits over 3 of gdp and to pursue the medium term objective of budgetary positions close to balance or in surplus the sgp also provides regulation for the surveillance of budgetary positions an analysis of tools for the surveillance of budgetary positions is the focus of this paper in particular it addresses two open issues in the empirical public finance literature which are crucial for monitoring fiscal policy discipline in the eu first the estimation of the structural component of the fiscal balance ratio second the computation when only annual fiscal data are available of quarterly budget balance ratios using relevant information from quarterly measured macroeconomic series an econometric model that addresses both issues is presented and estimated additionally this modelling framework allows us to answer questions such as what is the safety margin that will prevent a particular country from reaching with certain probability a budget deficit that breaches the 3 upper bound copyright 2004 john wiley sons ltd

tests of international capm with time varying covariances we perform maximum likelihood estimation of a model of international asset pricing based on capm we test the restrictions imposed by capm against a more general asset pricing model the betas in our capm vary over time as the supplies of assets change and as the conditional covariances or returns on those assets change we let the covariances change over time as a function of macroeconomic data and an alternative model allows the covariances to follow a multivariate arch process we also can identify a modified capm model with measurement error we find that the estimated capm performs much better when variances are not constant over time nonetheless capm is rejected in favour of the lessrestricted model of asset pricing

aggregate stability and balanced budget rules it has been shown that under perfect competition and a cobb douglas production function a basic real business cycle model may exhibit indeterminacy and sunspot fluctuations when income tax rates are determined by a balanced budget rule bbr this paper introduces in an otherwise standard real business cycle model a more general and data coherent class of production functions namely a constant elasticity of substitution production function we show that the degree of substitutability between production factors is a key ingredient to understanding the de stabilizing properties of a bbr then we calibrate the model consistently with the empirical evidence that is we set the elasticity of substitution between labor and capital below unity we show that compared to the cobb douglas case the likelihood of indeterminacy under a bbr is greatly reduced in the u s the eu and the uk

equilibrium political budget cycles political business cycle theories generally rely on nominal rigidities and voter myopia this paper offers an equilibrium theory that preserves some basic insights from earlier models though with significant refinements the political budget cycle emphasized here is in fiscal policy rather than output and inflation it arises via a multidimensional signal process one can consider the welfare implications of proposals to mitigate the cycle and the effects of altering the electoral structure copyright 1990 by american economic association

districts diversity and fiscal biases evidence from the american states abstract this paper argues that the configuration of legislative districts and not merely the number of districts matters for fiscal performance district configuration mediates the extent of constituent diversity both across and within districts both dimensions of diversity affect the political calculus associated with pork barrel politics empirical findings for the american states reveal statistically and quantitatively significant effects of constituent diversity on state government spending together the analysis and evidence emphasize the conditional nature of the law of l n in the united states this point acquires practical relevance from the constitutional mandate for decennial redistricting in all jurisdictions based on geographic representation

alternative estimators for factor garch models a monte carlo comparison this paper proposes four estimators for factor garch models two stage univariate garch 2sue two stage quasi maximum likelihood 2sml quasi maximum likelihood with known factor weights rmle quasi maximum likelihood with unknown factor weights mle a monte carlo study is designed for bivariate one factor garch models to examine the finite sample properties results are presented for biases ratios of standard errors to standard deviations ratios of variances coverage of confidence intervals effects of misspecified factor weights and finite sample properties of the 2sue for factor garch in mean models

the budget process and the size of the budget the new congressional budget process provides members of congress with a new set of institutional mechanisms for making budget decisions this article addresses the question of whether or under what conditions rigid application of the new budget process modeled as first selection of the size of the budget and second its division produces smaller budgets than a piecemeal appropriations process in which the size of the budget is determined residually the theoretical result is that the new process sometimes results in relatively large budgets a testable implication of the theory is that given a choice of how stringently the budget process is to be employed members of congress jointly consider preferences and the expected outcomes under available institutional arrangements and select the arrangement usually a rule that yields the most favorable outcome empirical results from the budget process in the house from 1980 to 1983 are generally supportive of the theoretically derived hypothesis of rational choice of institutional arrangements

the influence of political distortions on economic performance alberto alesina is the nathaniel ropes professor of political economy and chairman of the department of economics at harvard university in this interview he discusses with brian snowdon his views on several important contemporary issues including politics and the business cycle budget deficits currency unions the european union the size of nations economic growth inequality democracy foreign aid ethnic fractionalisation and the welfare state in the us and europe

over optimism in forecasts by official budget agencies and its implications the paper studies forecasts of real growth rates and budget balances made by official government agencies among 33 countries in general the forecasts are found i to have a positive average bias ii to be more biased in booms and iii to be even more biased at the 3 year horizon than at shorter horizons this over optimism in official forecasts can help explain excessive budget deficits especially the failure to run surpluses during periods of high output if a boom is forecasted to last indefinitely retrenchment is treated as unnecessary many believe that better fiscal policy can be obtained by means of rules such as ceilings for the deficit or better yet the structural deficit but we also find iv countries subject to a budget rule in the form of euroland s stability and growth pact sgp make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries this effect may help explain frequent violations of the sgp the question becomes how to overcome governments tendency to satisfy fiscal targets by wishful thinking rather than by action chile in 2000 created structural budget institutions that may have solved the problem independent expert panels insulated from political pressures are responsible for estimating the long run trends that determine whether a given deficit is deemed structural or cyclical the result is that chile s official forecasts of growth and the budget have not been overly optimistic even in booms unlike many countries in the north chile took advantage of the 2002 7 expansion to run budget surpluses and so was able to ease in the 2008 9 recession

the impact of expenditure rules on budgetary discipline over the cycle we study the impact of expenditure rules on the propensity for governments to deviate from their expenditure plans in response to surprising cyclical developments theoretical considerations suggest that due to political fragmentation in the budgetary process expenditure policy might be prone to a procyclical bias however this tendency may be mitigated by strictly enforced expenditure rules these hypotheses are tested against data from a panel of eu member states our key findings are that 1 deviations between actual and planned government expenditure tend to be positively related to output gap surprises and 2 expenditure rules reduce this procyclical bias these results are particularly pronounced when the analysis is confined to spending items with a high degree of budgetary flexibility

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

impacts of biodiesel on the brazilian fuel market this paper investigates market effects of the brazilian biodiesel law which made the use of biodiesel blended with petroleum diesel mandatory in brazil the study estimates the demand curve for diesel fuel biodiesel and petroleum diesel and the industry supply curve of biodiesel these two pieces of information have been used in a static analysis to draw scenarios with different biodiesel mandates the results show that the current proportion of biodiesel in the diesel mixture 5 increases consumers price by 1 7 and decreases the consumption by 1 5 compared to the scenario without biodiesel also an increase in the biodiesel percentage to 10 would raise the price by 3 5 and reduce the consumption by 3 2012 elsevier b v

fiscal discipline and the budget process the critical economic policy issue for many oecd countries developing countries and transition economies currently is fiscal consolidation and the maintenance of long run fiscal balance two related components underlie this general goal first several countries face the issue of deficit reduction particularly those countries with high debt gdp ratios second it is becoming increasingly apparent that major reforms of the welfare system and specifically of social security systems are critical ingredients of a long lasting fiscal consolidation see alesina and perotti 1995a in the case of monetary policy a constructive discussion has generated a widespread consensus about the benefits of different monetary institutions relatively few economists dispute the benefits of a certain amount of central bank independence even though different commentators and policymakers may disagree on the optimal degree of independence also a contracting approach has highlighted the benefit of inflation targeting and of certain institutional relationships contracts between the executive and the central bank a similar theoretical and empirical discussion on the role of budget procedures and budget institutions is just beginning in this paper we ask the following two questions i do budget procedures matter for the determination of the budget balance and its composition ii are there certain institutional reforms that one should feel comfortable in recommending based on the relatively scarce empirical evidence available we tentatively answer yes to the first question budget procedures matter on the second question we suggest that the two critical areas of reform are first more transparency second a strengthening of the roles of the executive branch vis a vis the legislature and of the treasury minister vis a vis the rest of the executive branch in order to achieve a centralized and top bottom approach to the budget process

multiyear budgets and fiscal performance panel data evidence abstract in the last two decades more than 120 countries have adopted a multiyear budget process medium term framework or mtf that enables the central government to set multiyear fiscal targets this paper analyzes a newly collected dataset of worldwide mtf adoptions during 1990 2008 it exploits within country variation in adoption in a dynamic panel framework to estimate mtfs impacts on aggregate as well as sectoral measures of fiscal performance we find that on average multiyear budgeting improves budget balance by about 2 percentage points with more advanced mtf phases having a larger impact higher phase mtfs also reduce health spending volatility while only the top phase mtf has a measurable impact on health sector technical efficiency

legislative organization and government spending cross country evidence abstract the law of 1 n posits that an increase in the number of elected representatives fuels excessive government spending despite its wide acceptance as a stylized fact the law of 1 n has received only limited empirical scrutiny and the existing evidence for the american states provides mixed support for the thesis this paper examines the law of 1 n in bicameral and unicameral legislative structures using a cross section of democratic countries the results indicate that legislative size matters under both legislature structures but bicameralism dampens the 1 n effect relative to unicameralism

independent and competing agencies an effective way to control government controlling government is a primary focus of the politico economic literature recently various political institutions have been analyzed from this perspective most importantly balanced budget rules fiscal federalism and direct democracy however one type of institution has been neglected so far elected competitors to the government such institutional competition between the government and an independent agency can be found at the swiss local level where finance commissions compete with the government in some parts of switzerland local finance commissions can ex ante criticize government projects and bring alternative policy proposals onto the political agenda which are then voted on by the citizens thus they become strong competitors to the government we econometrically investigate this institutional setting by comparing the 26 swiss cantons we find the power of the local finance commission to have an economically relevant statistically significant and robust negative effect on the tax burden and on public expenditures

a noncooperative theory of legislative coalitions this noncooperative theory is based on a model that incorporates an institutional structure that reflects the sequential process of agenda formation and voting in a legislature that has the task of allocating particularistic benefits among legislative districts the theory is intended to identify the incentives for the formation of proposal coordinating coalitions as a function of characteristics of the political system and the rules that govern agenda formation coalition proposals allocate all the benefits to their districts and whenever the coalition has discipline or controls the chair it will be of minimal winning size when proposals are governed by a closed rule when coalition discipline is absent and the chair is neutral the coalition will be comprised of approximately 70 of the legislature a legislative rule that allows amendments may result in larger coalitions coalition composition is also considered

double jeopardy globalization liberalization and the fiscal squeeze abstract the liberalization policies that underpin a globalizing world often have costly repercussions on public budgets at the national and subnational levels these costs are of two kinds additional spending requirements to adjust societies to fast economic change and challenges to resource mobilization the cumulative effects of these challenges put public authorities in a double bind as public spending needs increase with globalization their capacities to raise revenue weaken the ensuing fiscal squeeze poses yet another dilemma either running a fiscal deficit and paying the macroeconomic price or cutting spending which could jeopardize social cohesion and competitiveness itself

balanced budget rules and aggregate instability the role of consumption taxes it is known that in a real business cycle model with constant returns to scale and a balanced budget fiscal policy rule steady state indeterminacy may arise due to endogenous labour income tax rates this article shows that when the government finances its expenditures via an endogenous consumption tax instead a steady state is always saddle path stable consequently combining income taxes with consumption taxes makes the ranges of indeterminacy shrink thus reducing the possibility of aggregate instability from a policy perspective the results provide an additional argument in favour of consumption taxes in place of capital taxes