economic and political determinants of budget deficits in developing countries abstract the evidence from a large sample of developing countries tends to reject the empirical implications of optimizing models of the process of determination of fiscal deficits tax rates seigniorage and inflation the paper also presents some preliminary evidence that an important reason for the failure of the equilibrium approach to fiscal policy is that fiscal deficits are partly determined by political factors and that cross country differentials in budget deficits may depend on measures of political instability in particular as suggested by a number of recent theoretical approaches an increase in the degree of political instability appears to lead to greater budget deficits

unit roots structural breaks and cointegration in the uk public finances 1750 2004 in this article we report results from several traditional and more recently developed unit root and cointegration tests allowing for structural breaks which indicate that uk government revenue and spending during 1750 2004 were i 1 series and cointegrated and that the uk public finances have been on a consistently sustainable path over the long run

temporary and permanent government spending in an open economy some evidence for the united kingdom abstract this paper investigates the effects of government spending changes on a small open economy in an intertemporal substitution framework if agents internalize the government s budget constraint temporary and permanent spending have different implications for wealth and consequently different effects on output and the balance of trade estimation of these effects isolates the different channels through which government spending can influence economic activity main findings for the united kingdom are that government spending i crowds out private spending ii is directly productive and iii when rising permanently leads to a negative wealth effect which induces a large rise in work effort

a model of the federal reserve act under the international gold standard system abstract freeman am econom rev 86 1996a 1126 shows that an elastic money supply enhances the efficiency of monetary equilibrium by clearing default free debts at par value in the domestic credit market this research adds a foreign exchange market to freeman s model and extends his analysis into a two country model in which the arrival rates of agents are not equal between the two countries in this model an elastic money supply in the foreign exchange market to clear the exchange of fiat monies at gold standard parity accompanied by an elastic money supply in the domestic credit market could improve the efficiency of monetary equilibrium

supply shocks and the interest rate supply shocks and the interest rate i introduction a new approach to business cycles that stresses intertemporal substitution possibilities and market clearing equilibria has recently gained prominence key models that use this new classical framework include those of lucas 1972 barro 1976 1981b 1987a 1987g kydland and prescott 1980 1982 long and plosser 1983 and king and plosser 1984 although these models share the basic similarity of intertemporal maximization and market clearing they differ about which factors cause business cycle fluctuations however most of them admit a role for supply shocks such as opec oil price shocks and agricultural harvest failures most of the empirical work using the market clearing approach concentrates on quantities such as real gnp and ignores the key price variable of the intertemporal substitutional approach the real interest rate exceptions are the papers by benjamin and kochin 1984 and barro 1987a who use eighteenth and nineteenth century data to examine the effect of government spending on the nominal interest rate this paper extends previous work by studying not only the effects of government spending on the interest rate but also the effects of supply shocks on the interest rate the classic supply shock agricultural harvests is used indeed to the best of our knowledge this is the first paper to investigate how agricultural supply shocks affect the interest rate and as such it provides additional evidence about the factors that influence interest rates although the theory behind this work is cast in the framework of the equilibrium approach keynesian models also concur with the theoretical prediction that supply shocks raise the real interest rate thus this empirical investigation of the impact of harvests on the interest rate will command attention from keynesian as well as new classical macroeconomists section ii reviewers the theory used to motivate the work the third section discusses the data the fourth section presents the empirical results while the last section contains conclusions ii theory the equilibrium approach to macroeconomics emphasizes the role played by intertemporal optimization consumers maximize their intertemporal utility functions while firms maximize their profits as a result an intertemporal relative price the ex ante real interest rate emerges as a crucial variable consider the effect on the ex ante real interest rate from a temporary adverse supply shock such as a harvest failure in an agricultural closed economy consumers faced with a temporary shortfall in income and trying to smooth their consumption generally try to borrow in order to maintain their usual level of consumption thus the ex ante real interest rate increases much the same argument applies to government spending a temporary increase in government spending reduces the resources currently available to the private sector then as in the case of a temporary supply shock the increased demand for borrowing to smooth the reduction in disposable income leads to a higher interest rate an open economy is different when faced with a temporary reduction in resources from either an adverse supply shock or a temporary increase in government spending the private sector in an open economy is able to borrow from abroad by running a balance of trade deficit if the country in question is a small part of the world economy the increased borrowing does not affect the world ex ante real interest rate so the effect on the country s ex ante real interest rate is nil returning to the case of a closed economy supply shocks and changes in government spending affect the ex ante real interest rate only if they are temporary if they were permanent consumers would not have the same incentive to borrow so the interest rate would tend to be constant

the peaceful conspiracy bond markets and international relations during the pax britannica this article provides foundations to polanyi s famed argument that monopoly power in the global capital market served as an instrument of peace during the pax britannica 1815 1914 our perspective is novel we focus on the role of intermediaries and certification we show that when information and enforcement are imperfect there is scope for the endogenous emergence of prestigious intermediaries who enjoy a monopoly position and as a result control government actions they can implement conditional lending they subject the distribution of credit to the adoption of peaceful policies prestigious intermediaries act that way because of their concern with maintaining an unblemished track record when wars increased risks of default our analysis which brings together insights from different disciplines provides a significant extension to and departure from recent research on how countries accumulate reputational capital

postwar british economic growth and the legacy of keynes the policies used by britain to finance world war ii represented a dramatic departure from the policies used to finance earlier wars and were very different from the policies used by the united states during the war following keynes s recommendations britain taxed capital income at a much higher rate than the united states during the war and for much of the postwar period we analyze quantitatively the policies designed by keneys using an endogenous growth model and the ncoclassical growth model we also evaluate the implications of tax smoothing policies we find that the welfare costs of keynes s policies were very high relative to a tax smoothing policy and argue that britain s poor macroeconomic performance in the early postwar period is a consequence of the high tax rates levied on capital income

nominal sovereign debt i show that reputation alone can sustain nominal sovereign debt which is subject to both the risks of default and opportunistic devaluations nominal debt combined with a countercyclical exchange rate policy allows more hedging against shocks than real savings if markets are incomplete thus the loss of either repayment or monetary reputation severely affects the government s ability to smooth consumption the model offers a simple explanation for the bulow and rogoff critique while simultaneously helping explain the issuance of nominal sovereign bonds by emerging economies the model also helps explain why many governments borrow and save at the same time

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

peacock and wiseman s displacement hypothesis some new long run evidence for the uk this article presents new evidence on the ability of peacock and wiseman s displacement hypothesis to explain temporal increases in the ratio of government expenditure to gross domestic product gdp in the uk using univariate modelling techniques that are robust to structural changes in the underlying data generating process and a data set extending back to 1836 we find four instances where the ratio of expenditure to gdp displays an evidence of a structural break two of these breaks coincide with major social upheavals as predicted by the displacement hypothesis

interest rates and expected future budget deficits in the united states several recent empirical studies have found no evidence of a positive association between interest rates and current and past budget deficits one possible explanation for this finding is that interest rates are related much more to the expectation of future budget deficits than to current and past budget deficits in this paper i investigate whether this explanation is valid finding no evidence that it is section ii briefly formulates and discusses the hypothesis under consideration stating some of its implications section iii presents the results of regressing the commercial paper rate moody s aaa bond rate and the ex post real commercial paper rate on current and past government spending budget deficits and real money supplies the regressions have been fitted to the entire sample of monthly data spanning the period between june 1908 and march 1984 and to 11

government spending interest rates prices and budget deficits in the united kingdom 1701 1918 abstract the british data from the early 1700s through wwi provide an unmatched opportunity for studying temporary changes in government purchases temporary increases which appeared mainly as wartime spending raised long term interest rates but significantly increased the growth rates of money and prices only during suspensions of the gold standard 1797 1821 and 1914 1918 temporary changes in military spending accounted for the bulk of budget deficits over the sample of more than 200 years i found only two major non war deficits one associated with compensation payments to slaveowners in 1835 1936 and the other with a dispute over the income tax in 1909 1910 interest rates did not react much to these exogenous deficits

volatility in an era of reduced uncertainty lessons from pax britannica abstract although it has been well established that financial volatility is related to news and macroeconomic shocks less emphasis has been placed on the importance of underlying economic and political stability in this paper we study the behavior of consol returns since 1729 and identify a greater than 50 decline in volatility from the end of the napoleonic wars in 1815 until the first world war news events and macroeconomic variables cannot account for this extended period of reduced volatility underlying political stability under pax britannica seems to be a more likely explanation

state capacity and military conflict powerful centralized states controlling a large share of national income only begin to appear in europe after 1500 we build a model that explains their emergence in response to the increasing importance of money for military success when fiscal resources are not crucial for winning wars the threat of external conflict stifles state building as finance becomes critical internally cohesive states invest in state capacity while divided states rationally drop out of the competition causing divergence we emphasize the role of the military revolution a sequence of technological innovations that transformed armed conflict using data from 374 battles we investigate empirically both the importance of money for military success and patterns of state building in early modern europe the evidence is consistent with the predictions of our model

fiscal policy and the term structure abstract this paper investigates the empirical association between deficits in interest rates it extends the results in plosser 1982 to include the more recent experience the association between a measure of ex ante real rates and deficits is also considered the results largely corroborate the previous results first little or no association between real or nominal interest rates and deficits is found second output and to a lesser extent military spending are found to have a significant association with interest rates

quantal response equilibrium models of the ultimatum bargaining game abstract this paper investigates the implications of quantal response equilibrium qre models mckelvey and palfrey 1995 games econ behav 10 6 38 1998 exper econ 1 9 41 in the ultimatum bargaining game it is shown that in a normal form qre nqre each bargainer s decision depends critically on the anticipated behavior of the other and there is a nqre in which the proposer makes any offer between zero and equal split as a strict best response the application of nqre to the experimental data slonim and roth 1998 econometrica 66 569 596 suggests that the history dependence observed in the experiment is a result of the strategic interactions between bargainers

u s war costs two parts temporary one part permanent military spending fatalities and the destruction of capital all of which are immediately felt and are often large are the most overt costs of war they are also relatively short lived but the costs of war borne by combatants and their caretakers which includes families communities and the modern welfare state tend instead to be lifelong in this paper i show that a significant component of the budgetary costs associated with u s wars is long lived one third to one half of the total present value of historical war costs are benefits distributed over the remaining life spans of veterans and their dependents even thirty years after the end of hostilities typically half of all benefits remain to be paid estimates of the costs of injuries and deaths suggest that the private burden of war borne by survivors namely the uncompensated costs of service related injuries are also large and long lived

institutions freedom and technical efficiency the impact of institutions on economic performance is currently the subject of much research in this study we use panel data to estimate a stochastic production frontier and the sources of inefficiency for a broad set of countries a maximum likelihood procedure is used to estimate the parameters for the stochastic production frontier and the determinants of inefficiency simultaneously our results show that institutions that promote greater economic freedom in turn promote efficiency

government financing decisions and asset returns abstract this paper presents an empirical investigation of the relation between government financing decisions and asset returns in particular the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates the paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior the results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures the results however also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases

interest costs and the optimal maturity structure of government debt the government faces a trade off between the benefits of tax smoothing and an associated increase in expected interest costs when choosing its optimal debt portfolio the article solves for optimal policies in an incomplete markets model where the government uses two debt instruments long term and short term non contingent nominal bonds in this setup the basic prescription is to borrow long and invest short even though equilibrium expected interest costs are higher on long term debt the resulting welfare gains are close to what the government could achieve with complete markets significant welfare gains are possible even in the presence of leverage constraints

government expenditure and economic growth evidence from g7 countries this paper examines wagner s law of public expenditure which emphasizes economic growth as the fundamental determinant of public sector growth using time series data drawn from the g7 industrialized countries over the sample period 1960 1993 it presents evidence on both the short and long run effects of growth in national income on government expenditure by resorting to recent developments in the theory of cointegrated processes an attempt is also made in this study to examine if wagner s law holds between certain key components of government expenditure and income