pressure groups and public expenditures the flypaper effect reconsidered a model of government budgeting is developed in which lobbying by interest groups can divert the allocation of funds away from the one preferred by the median voter the model is applied to state and local governments to show that the flypaper effect the tendency for lump sum grants to increase public expenditures by more than an equivalent increase in the community s pretax income can be explained without the customary assumption of voter fiscal illusion furthermore the model predicts variation in the extent of the flypaper effect among expenditure categories as found in previous empirical studies

combination monetary policies to stabilize price and output under rational expectations sargent and wallace 1 1 12 conclude that in a model with a lucas type supply curve and the assumption of rational expectations there is no sense in which the monetary authority has the option to conduct countercyclical policy 12 p 177 sargent and wallace confine their analysis to pure money stock or interest rate policies woglom 14 drawing on the earlier work of poole 10 leroy 5 and leroy and waud 6 examines the effectiveness of combination policies within a model where expectations are formed rationally and with a lucas type supply schedule within the poole or woglom models a combination policy amounts to setting a deterministic relationship between the money stock and the interest rate leroy and leroy and waud make clear that the ability to execute such combination policies depends on the current observability to the monetary authority of the interest rate and money stock or level of reserves in the leroywaud framework since the monetary authority s policy setting is conditioned on such current information while in woglom s framework private agents expectations are conditioned only on past information systematic policy actions the parameters of the combination policy will affect the distribution of real output the sargent wallace

the tragedy of the commons and economic growth why does capital flow from poor to rich countries we analyze a differential game in which all interest groups have access to a common capital stock we show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons we use this model to analyze capital flight in many poor countries property rights are not well defined since safe bank accounts in rich countries the inferior technology are available to citizens of these countries they engage in capital flight we show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare

tax base variability and procyclical fiscal policy in developing countries abstract based on a sample of 56 countries we show that fiscal policy in the g7 countries appears to be acyclical while fiscal policy in developing countries is procyclical i e fiscal policy is expansionary in good times and contractionary in bad times to explain this puzzle we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending given this distortion a government that faces large fluctuations in the tax base as is the case for developing countries will find it optimal to run a procyclical fiscal policy

intergovernmental transfers and procyclical public spending this paper tests the predictions that i sub central government expenditures are procyclical and ii sub central government expenditures are likely to be more procyclical than central government spending the predictions are based on the importance of voracity effects and on the proposition that they are systematically more pervasive if spending is financed by intergovernmental transfers evidence from 23 oecd countries between 1995 and 2006 indicates that sub central government spending is more procyclical than central government expenditure

the flypaper effect what happens to a state s spending when it receives an unconditional grant from the federal government the standard theoretical analysis predicts that the increase in spending will be the same as that generated by an equivalent increase in local incomes or roughly 5 10 percent for most states in contrast numerous empirical analyses have found that spending increases by much more with some estimates near 100 percent this result is known as the flypaper effect since the money appears to stick where it hits the authors review this evidence as well as other studies that find similar behavior in firms

a balanced budget constraint in modern stochastic macromodels currently september 1985 a constitutional balanced budget amendment is pending in the u s senate thirty two states have passed resolutions calling for a constitutional convention to enact such an amendment in 1963 senator harry byrd sr asked budget director kermit gordon what balancing the budget would do for the country gordon replied that it probably would add about 2 5 million people to the rolls of the unemployed delay the recovery about four years and knock 10 percent off u s output 16 284 the keynesian conventional wisdom of the 1960s was that fiscal and monetary policy should focus on the benefit cost tradeoffs between inflation and unemployment stabilization along with tradeoffs implicit in resource allocation and the distribution of income given these objectives there should be no independent consideration of the budget deficit of the federal government 24 as abba lerner argued in his early statement of keynesian principles of functional finance the instruments to prevent unemployment and inflation are not available until it is recognized that the size of the national debt is relatively unimportant 17 302 as outlined by walter heller 15 and others the stabilization role of fiscal policy together with monetary policy in the 1960s was to provide the appropriate degree of stimulus or restraint to achieve a target level of real output since the mid 1960s such a role for fiscal policy has been challenged first by the friedman phelps 14 27 accelerationist hypothesis and then by the lucas sargent 19 29 policy ineffectiveness proposition the accelerationist or natural rate theory especially as advanced by milton friedman argues that stabilization policy should be geared toward rules and control of nominal variables such as the inflation rate friedman s analysis also implies the futility of using aggregate demand policy to achieve fixed output targets friedman s analysis suggests the possibility that with monetary policy geared to price stabilization and with sustainable real output gains not attainable via aggregate demand policy fiscal policy instruments may be adjusted to achieve a balanced budget without cost buchanan and wagner 7 rely on friedman s analysis to support their call for a constitutional balanced budget amendment

choosing a monetary instrument the case of supply side shocks abstract this paper examines the monetary instrument choice problem in models with an explicit supply sector and endogenous prices and price expectations we use the popular linear quadratic certainty equivalence framework to obtain analytic solutions the results indicate that interest rate policies generally are better able to insulate the real sector from unanticipated supply shocks we also show that at this level of abstraction the optimal choice of an instrument is independent of the specification of expectations e g rational vs adaptive price expectations the paper then reports empirical evidence from two experiments on the large nonlinear mit penn ssrc econometric model the evidence is consistent with the hypothesis that interest rate policies are preferable if the supply sector is the major source of uncertainty

politico economic equilibrium and economic growth abstract we propose a notion of dynamic politico economic equilibrium which builds on two key assumptions policies are determined sequentially and agents are fully rational in their roles as both consumers and voters we examine a simple model of endogenous growth and infinitely lived agents where taxes on income are endogenous and where growth critically depends on the initial distribution of asset holdings we relate our equilibrium definition and results to existing literature on time consistency and on political economy and growth we show that our equilibria are time consistent and we argue that the choice of equilibrium concept might have important quantitative implications

fiscal policy and monetary integration in europe fiscal policy economists policy makers and the media often argue that the maastricht treaty and the stability and growth pact make it difficult for governments of emu countries to stabilize their economies with appropriate fiscal policy and to provide adequate public investment our empirical analysis offers little support to this view discretionary budget deficits have actually become more counter cyclical in emu countries after the maastricht treaty as well as in the other eu and non eu industrialized countries we study and while public investment has declined recently in emu countries a similar tendency is apparent in other countries and started well before the maastricht treaty was signed jordi gali and roberto perotti

budget deficits and social protection cyclical government expenditure in the oecd countercyclical government spending offers social protection to the vulnerable when economies move into recession this paper questions the extent to which governments are able to spend countercyclically and the extent to which social expenditures are likely to be countercyclical an analysis of public spending in oecd countries 1980 2005 suggests countercyclical social protection is constrained by the limits to public borrowing and the degree of political polarization

the comparative politics of labor initiated reforms swedish cases of success and failure this article explores the reasons why some reform initiatives launched by the swedish labor movement have succeeded and others have failed it presents four case studies two success stories the pension reform of 1959 and the industrial democracy reforms of the 1970s and two failures inheritance taxation in the 1920s and 1940s and wage earner funds in the 1970s the article casts these case studies in an analytical framework that emphasizes three variables to the extent that they challenge the interests of capital labor s reform initiatives are likely to precipitate a powerful countermobilization but the politics of reformism are also shaped by the extent to which labor s initiatives embody a universalistic conception of social justice and or appeal to the material interests of swing voters

fiscal federalism and procyclical spending the cases of argentina and brazil este trabajo estudia las fuentes de la prociclicalidad del gasto para gobiernos subnacionales en argentina y brasil encontramos que los esquemas de coparticipacion de los impuestos explican solo una parte menor de la prociclicalidad de los recursos de las entidades subnacionales siendo la mayor parte explicada por la prociclicalidad de los propios recursos esto es especialmente visible cuando esa prociclicalidad se mide relativa al producto de cada entidad subnacional usando evidencia de corte transversal para distintas jurisdicciones podemos concluir que a su vez la prociclicalidad del gasto resulta de la prociclicalidad de los recursos mediante el llamado voracity effect la conclusion es que el debate sobre la prociclicalidad del gasto de entidades subnacionales debiera concentrarse mucho mas en mejorar los sistemas impositivos locales que en cambiar los regimenes de coparticipacion

why is fiscal policy often procyclical many countries especially developing ones follow procyclical fiscal policies namely spending goes up taxes go down in booms and spending goes down taxes go up in recessions we provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less than benevolent government to appropriate rents voters have incentives similar to the starving the leviathan classic argument and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well we test this argument against more traditional explanations based purely on borrowing constraints with a reasonable amount of success

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

targeting nominal income further results there has been a great deal of interest in designing optimal policy in stochastic macroeconomic models under rational expectations many authors including turnovsky 11 and benavie and froyen 2 have stressed that pure policy rules such as a strict money rule or an interest rate peg are generally not the optimal policy response to both demand and supply shocks recently however bean 1 has disputed this claim using a version of the standard sargent and wallace 10 model he shows that nominal income targeting provides an optimal response to both demand and supply shocks as long as labor supply is perfectly inelastic extending this analysis bradley and jansen 3 report that the argument in favor of nominal income targeting is substantially strengthened by considering optimal wage indexing they show that the combination of nominal income targeting and optimal wage indexing to price is perfectly stabilizing regardless of the elasticity of labor supply this paper extends the work by bean 1 and bradley and jansen 3 to the case of an interest elastic and wealth elastic labor supply the goal is to determine if nominal income targeting continues to provide the optimal response to both demand and supply disturbances in a more general model bean and bradley and jansen utilize the so called lucas supply curve a standard construct in new classical models that is often justified by reference to the work of lucas and rapping 7 however lucas and rapping actually derive a supply curve in which both the ex ante real rate of interest and wealth affect aggregate supply 2 this paper employs a supply curve which includes both interest rate and wealth effects and finds that with this more general supply curve nominal income targeting even in combination with wage indexing is not perfectly stabilizing prior results by bean 1 and bradley and jansen 3 are the result of the lucas supply

comment choosing a monetary instrument the case of supply side shocks abstract in a recent paper craine and havenner 1981 claim that an additional advantage of the linear quadratic framework which is not well known is that the basic forces affecting the instrument choice decision can be analyzed without an explicit specification for price expectations since the distribution of the error terms in a linear model is independent of the predetermined variables p 219 the aim of this note is to demonstrate that craine and havenner s claim does not generalize to models with expectations of future variables conditioned on present information such as turnovsky s 1980 model

why do more polarized countries run more procyclical fiscal policy abstract we study the cyclical behavior of fiscal policy to explain why some countries exhibit procyclical fiscal policy stances being expansionary in good times and contractionary in bad times we develop a model that links the polarization of preferences over fiscal spending to the procyclicality bias we then present evidence that social polarization as measured by income inequality and educational inequality is consistently and positively associated with fiscal procyclicality even after controlling for other determinants from existing theories we also find a strong negative impact of fiscal procyclicality on economic growth

rent seeking market structure and growth we study the role of productive and unproductive entrepreneurship in economic growth in a setting where firms compete in both economic and political markets specifically firms compete for market share through cost reducing technological innovation and they vie for influence over government transfer policy through rent seeking activities we find that rent seeking affects growth in two ways it allows firms to ignore economic competition leading to less innovation and it alters the number of firms that are supported in equilibrium the former effect is negative while the latter is ambiguous we show how these effects depend on various characteristics of economic and political markets

procyclical government spending patterns of pressure and prudence in the oecd this paper tests for differences in the cyclicality of government spending across functional categories evidence from 20 oecd countries suggests that procyclicality is more likely in smaller functional budgets but capital spending is more likely to be procyclical for the larger spending categories

appropriation violent enforcement and transaction costs a critical survey this paper focuses on the extension of transaction costs to appropriative activity and coercive power in the property rights approach it has been argued that including the costs of appropriation and violent enforcement in transaction costs is based on the assumption that coaseian bargaining can be extended to any institutional scenario i e voluntary as well as coercive exchange however voluntary transactions cannot capture the logic of coercive power this means that the assumption of an efficient political market is not valid and that the political coase theorem lacks the logical consistency to provide a cornerstone for political theory

the cyclical behaviour of fiscal policy evidence from the oecd this paper addresses the topic of cyclicality in scal policy in particular we show that the level of cyclicality varies across spending categories and across oecd countries in line with leading theories of scal cyclicality we show that countries with volatile output and dispersed political power are the most likely to run procyclical scal policies wage government consumption is highlighted as the most important channel by which these variables affect scal cyclicality

the flypaper effect identifying areas for further research the flypaper effect literature dates back three decades it is overwhelmingly neo classical in approach attempting to improve the median voter demand model and or temper it with public choice supply side perspectives whilst this approach provided valuable early substantial analytical insights more recent papers seem to have contributed only marginally to an understanding of the flypaper effect if indeed it exists at all hence as well as providing a long overdue comprehensive review of the literature on the flypaper effect this paper identifies more productive avenues for further research

procyclical government spending a public choice analysis procyclical government spending occurs when government expenditures increase at a faster rate than income in an economic upturn but fall at a faster rate in a recession voracity effects occur when competition for increased spending proves more effective as national income increases public choice theory can be applied to describe the distribution of fiscal power across different tiers of government to shed insight into competition for intergovernmental transfers politicians have electoral incentives to press for intergovernmental transfers but they also have electoral incentives to signal their ability to manage the economy with this mix of incentives the prediction is that intergovernmental transfers will be procyclical and that sub central government spending will be more procyclical than central government spending public choice analysis of pressure for increased public spending predicts a specific pattern of cyclical government spending this pattern can be observed when analyzing government expenditures in 20 oecd countries between 1995 and 2006

government science and technology budgets in times of crisis abstract following a recent paper by filippetti and archibugi filippetti a archibugi d 2011 innovation in times of crisis national systems of innovation structure and demand research policy 40 2 179 192 this article aims to contribute to the sparse literature on the impacts of the recent economic downturn on the government expenditures and innovative activities of the countries of the enlarged european union eu 27 using eurostat s socio economic objectives i e the nomenclature for the analysis and comparison of scientific programmes and budgets nabs 2007 classification this paper addresses the impact of the recent economic downturn on governments science and technology s t budgets across the 27 eu countries most countries followed a pro cyclical pattern where the government s t budgets in most nabs shrunk along slowing gross domestic product growth in similar pace with total government expenditure the new member states of eastern europe were the most affected

debt sustainability and procyclical fiscal policies in latin america the computation of structural primary balances for the nine main latin american countries and the comparison of their changes with their cyclical position during the period 1981 2004 confirm that fiscal policy is procyclical in the region from this evidence the paper shows strong evidence that the fiscal behavior is closely linked to the financial vulnerability position of the economies and in particular to the perception on the sustainability of public debt the current threshold balance defined as the primary balance that would render the debt stable under the existing economic and financial conditions is used as our gauge for measuring debt sustainability concerns at each point in time the empirical analysis reveals that fiscal stance tightens when the perceptions of debt sustainability worsen that the impact is stronger the less sustainable debt is perceived and that when controlling for these effects fiscal policy loses its procyclical stance the results are robust to different specifications and estimation methods

output fluctuations and fiscal policy u s state and local governments 1978 1994 abstract we study the cyclical properties of u s state and local government fiscal policy the budget surpluses of both are procyclical over short and medium term horizons procyclical surpluses are the result of strongly procyclical revenue and weakly procyclical expenditure these results hold whether aggregate u s wide fluctuations are controlled for or not federal grants to state and local governments are procyclical but this is due to aggregate output fluctuations with respect to state level output fluctuations federal grants are countercyclical the budget surpluses of trust funds and utilities are also procyclical but there is no evidence that this effect is stronger in states where balanced budget rules are tighter the cyclical patterns of state and local budget surpluses are affected by various political institutions for example budget surpluses are less procyclical in conservative states in an election year that occurs in good times state governments refrain from accumulating a larger surplus in bad times no such asymmetry between election and non election years is apparent

the optimality of nominal income targeting when wages are indexed to price in the last decade there has been renewed interest in alternative monetary regimes institutions and policy procedures one policy proposal that has received increased attention is nominal income targeting this proposal has been suggested for instance by feldstein 9 gordon 13 hall 16 meade 21 and tobin 25 26 taylor 24 discusses this proposal in some detail and mccallum 20 presents a statistical analysis of a particular nominal income targeting rule in a variety of contexts bean 3 presents a theoretical analysis of nominal income targeting examining the properties of such a policy in a stochastic macro model in which rational agents sign nominal wage contracts given that the monetary authority s objective is to minimize the divergence of output from its full information level nominal income targeting is the optimal policy if labor supply is perfectly inelastic with an elastic labor supply however nominal income targeting provides the optimal response to demand side shocks but not to supply side shocks the problem of designing optimal policy in the face of both demand and supply side shocks is not new authors such as benavie and froyen 4 craine and havenner 8 parkin 22 and turnovsky 27 have stressed that pure policy rules such as a strict money rule or an interest rate peg are generally not the optimal policy response to both demand and supply shocks thus bean s result that nominal income targeting provides the optimal policy response to all shocks as long as labor supply is perfectly inelastic is rather impressive one avenue of research that attempts to provide a partial solution to the problem of suboptimal policy rules in the face of demand and supply shocks is the investigation of wage indexing work by gray 14 15 drew attention to the properties of nominal wage contracts indexed to the price level the relation between the monetary authority s choice of policy rule and the degree of indexing in the labor market has been investigated by fethke and policano 11 fethke and

volatility of development aid from the frying pan into the fire summary the paper building on the authors previous analysis examines the relative volatility of aid flows into developing countries and their domestic revenue using new data and three alternative measures of aid instability relative volatility vis a vis fiscal revenue unpredictability of aid disbursement relative to commitments and failure of aid to smooth fluctuations in aggregate income it finds that the volatility of aid flows is still much greater than that of domestic revenue and that this difference is not decreasing especially in very poor aid dependent countries this high volatility of inflows makes the macroeconomy hard to manage further the influence of aid has been procyclical and not countercyclical aid has failed to act either as a stabilizing force or as an insurance mechanism we argue that to counter these unwelcome trends donors need to be able to respond more speedily and effectively to large adverse shocks and their conditionalities need to become more flexible possibilities explicitly discussed elsewhere in this special section

to invest or insure how authoritarian time horizons impact foreign aid effectiveness in this article the author argues that the time horizon a dictator faces affects his incentives over the use of aid in three ways first dictators have a greater incentive to invest in public goods when they have a long time horizon second dictators with short time horizons often face the threat of challengers to the regime this leads them to forgo investment and instead consume state resources in two forms that harm growth repression and private pay offs to political opponents third dictators with short time horizons have a strong incentive to secure personal wealth as a form of insurance in case the regime falls using panel data on dictatorships in 71 developing countries from 1961 to 2001 the author finds that time horizons have a positive impact on aid effectiveness foreign aid is associated with positive growth when dictators face long time horizons and negative growth when time horizons are short

political foundations of the resource curse in this paper we argue that the political incentives that resource endowments generate are the key to understanding whether or not they are a curse we show 1 politicians tend to over extract natural resources relative to the efficient extraction path because they discount the future too much and 2 resource booms improve the efficiency of the extraction path however 3 resource booms by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections increase resource misallocation in the rest of the economy 4 the overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create countries without such institutions however may suffer from a resource curse

the competitive externalities and the optimal seignorage this study analyzes the inflation tax in an economy with several competing decisionmakers who can effectively print more money via the central bank the author derives the sequential rational expectation equilibrium and shows that the presence of competing decisionmakers increases the inflation rate and may put the economy on the wrong side of the inflation tax laffer curve the analysis is interpreted for a country consisting of several states or provinces where the centralized government system is weak similar results apply to the case of competing ministers in an economy where the central bank is weak copyright 1992 by ohio state university press

monetary policy in a model with a federal funds market fixed versus flexible deposit rates this paper examines the comparative static effects of various monetary policy instruments under the assumption of a market determined interest rate on demand deposits and alternatively for the case of an exogenously fixed demand deposit rate in both cases monetary policy effects are analyzed where the monetary policy operating target is either the federal funds rate or a reserve aggregate the aim of the paper is to assess the differences in monetary policy effects for each operating procedure between the flexible and fixed deposit rate cases we extend previous analyses of this subject by incorporating an explicit federal funds market in our model and providing a detailed analysis of monetary policy with a federal funds rate operating target with both a flexible and a fixed deposit rate additionally we consider the differences in the role of secondary monetary policy instruments such as the discount rate and the required reserve ratio in the different regimes finally the paper considers the implications of flexibility of the deposit rate for the feasibility of the current monetary policy strategy of using a short run operating target either the federal funds rate or a reserve aggregate to attain target

politics and the effectiveness of foreign aid abstract critics of foreign aid programs have long argued that poverty reflects government failure in this paper i test predictions for aid effectiveness based on an analytical framework that relates aid effectiveness to political regimes i find that aid does not significantly increase investment nor benefit the poor as measured by improvements in human development indicators but it does increase the size of government the impact of aid does not vary according to whether recipient governments are liberal democratic or highly repressive but liberal political regimes and democracies ceteris paribus have on average 30 lower infant mortality than the least free regimes this may be due to greater empowerment of the poor under liberal regimes even though the political elite continues to receive the benefits of aid programs an implication is that short term aid targeted to support new liberal regimes may be a more successful means of reducing poverty than current programs

opening the window for reform mandates crises and extraordinary policy making under what conditions are governments within established democratic political systems willing and able to launch ambitious reform programs in other words what conjunctural factors generally serve to open the window for reform the central argument of this article is that extraordinary policy making generally becomes possible only when a macro window is opened by a government s achievement of an impressive mandate and or by the onset of a severe socioeconomic crisis the mandate reform hypothesis is tested with data from britain france and the united states then the significance of both mandates and crises is demonstrated through an analysis of eight reform government case studies ranging from the new deal to thatcher s britain

status concern and the exploitation of common pool renewable resources we examine the impact of social status concern in a common pool renewable resource oligopoly a small number of players share access to a common pool resource and sell their production in a common market where they are oligopolists we depart from the mainstream literature on common pool resource oligopolies by considering that each player cares about her social status we allow for two channels to impact a player s welfare harvest and profits under the first channel a player has a bump in her utility when her harvest is larger than the average harvest of the rest of the players in this case we show that the presence of this channel exacerbates the tragedy of the commons under the second channel a player enjoys a bump in her utility if she manages to earn more profits than the average profits of the other players in this case we show that social status concern may temporarily alleviate the tragedy of the commons it results in a decrease of extraction over an interval of stock sizes

do corrupt governments receive less foreign aid critics of foreign aid programs argue that these funds often support corrupt governments and inefficient bureaucracies supporters argue that foreign aid can be used to reward good governments this paper documents that there is no evidence that less corrupt governments receive more foreign aid on the contrary according to some measures of corruption more corrupt governments receive more aid also we could not find any evidence that an increase in foreign aid reduces corruption in summary the answer to the question posed in the title is no