rules stability and growth abstract this paper examines two systems of fiscal redistribution in the context of a growing economy subject to unexpected shocks rules and discretion under the former system the tax system is in place and is known to households contemplating investment decisions under the second redistribution is decided upon only after the investment decisions have been made i find that rules always lead to faster capital accumulation and growth but political support for them is only likely to occur in a stable economy income inequality adversely affects the likelihood of adopting rules especially so in an unstable economy

capital taxation and government debt policy with public discounting abstract this paper characterizes capital taxation and public debt policy in a quantitative macroeconomic model with an impatient government and uncertainty the government has access to linear taxes on capital and labor and to non state contingent bonds government impatience generates positive and empirically realistic long run levels of both capital taxes and public debt prior predictive analysis shows that the simulated model matches the distribution of both variables in a sample of 42 countries alongside other statistics the paper then presents econometric evidence that countries with higher political instability used as an approximation of unobservable public discount rates have both higher capital taxes and debt

political instability corruption and policy formation the case of environmental policy abstract this paper develops a theory of environmental policy formation taking into consideration the degree of corruptibility and political turbulence the predictions that emerge are that the interaction between the two variables is important political instability has a negative effect on the stringency of environmental regulations if the level of corruption is low but a positive effect when the degree of corruption is high corruption reduces the stringency of environmental regulations but the effect disappears as political instability increases the empirical findings are fully consistent with the predictions of the model

emission trading with fiscal externalities the case for a common carbon tax for the non ets emissions in the eu a government is fiscally constrained if it is unable to raise sufficient tax revenue to finance the first best level of public spending when involved in emission trading a fiscally constrained government will potentially seek to close its fiscal gap through emission permit sales this fiscal incentive therefore generates a fiscal externality in the permit market that is endogenous to the extent of fiscal constrainedness among the participating countries our theory explains how and when fiscal externalities may be expected to arise moreover we show that in a permit market equilibrium with fiscal externalities the initial allocation of emission permits between countries will affect 1 the price of emission permits 2 the global distribution of abatement effort and 3 total greenhouse gas mitigation costs this is contrary to the textbook model of emission permit markets our findings are especially relevant for the eu which is about to allow for trading in emission rights between eu member countries for all emissions outside the european emissions trading system

effort observability and worker productivity towards an explanation of economic dualism this paper suggests an explanation of the wage and productivity differentials between formal and informal sectors in developing countries this explanation is based on differences in the observability of effort that arise from technological differences such as size of operation the authors argue that observability of effort is lower in the formal sector and then show that under reasonable conditions this leads to higher wages and higher effort productivity this is because with lower observability the marginal cost of effort is lower when existing employees are induced to work harder than when more workers are hired explanations for intersectoral differences in factor intensities and sector specific unemployment rates also follow from the authors basic assumptions copyright 1989 by royal economic society

political and institutional determinants of fiscal policy in the european community in recent theoretical and empirical research the variation in political and institutional arrangements which may affect the process of national policy formation is examined in order to explain cross country differences with respect to fiscal policies pursued in this paper we build upon this literature and examine whether and how cross country differences in debt accumulation and public sector size of member countries of the european community during the 1980s can be explained we conclude that the growth of government debt is positively related to the frequency of government changes and negatively to sound budgetary procedures in countries with left wing governments the growth of the share of government spending in total output generally tends to be higher

income inequality size of government and tax progressivity a positive theory abstract i investigate the relationship between income inequality and the composition of public spending in redistributive policies i extend the meltzer richard model of voting over redistribution allowing voters to choose not only the amount of a uniform lump sum transfer but also the level of provision of a public good the governmental budget is balanced thus these two choices determine the tax rate on labor income the multidimensionality of the policy space implies that there is no condorcet winner i adopt a citizen candidate model of electoral competition to tackle this problem i show that the progressivity of the tax system is increasing in the mean to median income ratio while the size of the government need not be this means that higher income inequality implies a more progressive tax system but in contrast with the traditional analysis it may also result in a smaller size of government such results are consistent with the most recent findings in the empirical literature

political regimes and the extractive capacity of governments taxation in democracies and dictatorships recent political and economic transformations in latin america africa asia and eastern europe have brought about a renewed interest in the incentives and capabilities of different types of political regimes to implement policies that are deemed necessary for economic development in particular policies aimed at increasing tax revenue one central question is whether democracies can collect as much in taxes as dictatorships this article addresses this question by examining whether regime type classified as democracy or dictatorship has a causal impact on a government s capacity to mobilize resources through taxation on the basis of data gathered for 108 countries for the period between 1970 and 1990 the article concludes that observed differences across countries regarding the level of taxes collected by the government are not due to the fact that some are under a democracy and others under a dictatorship concerns about the inability of democratic regimes to collect taxes are therefore unfounded

time consistent collection of optimal seigniorage a unifying framework this paper reviews the existing literature on the time consistency problem of seigniorage collection when monetary policy is determined by optimal taxation considerations it develops a unifying accounting framework and suggests a general measure for seigniorage which encompasses the standard measures employed in the literature in addition the ex ante optimal solution to the optimal taxation problem is derived and interpreted in relation to the ramsey principle we show that the different recommendations of the public finance literature i e the friedman rule of optimal deflation moderately positive inflation and seigniorage maximizing inflation are specific solutions to the optimal taxation problem the paper continues with a formal illustration of the time consistency problem of the ex ante optimal policy and the characterization of the time consistent solution under discretion as possible solutions to the time consistency problem we consider reputational forces institutional reforms that establish central bank independence and specific ways of asset and debt management in particular it is formally shown that a modified version of the asset and debt management scheme suggested by persson persson and svensson is not only necessary but also sufficient for optimality although this did not hold in their model

can we improve the structure of financial systems 1993 the main theme of this paper is that several of the characteristics of our present western monetary and banking systems have been crucially dependent on the particular temporal process of historical development and are not an essential feature of more fundamental preferences or technological conditions they exist in part because we take them for granted it is the purpose of this paper to examine what might change in both theory and practice if some of these inessential characteristics were to be changed

capital flight and political risk abstract this paper provides the first serious attempt to examine the relationship between political risk and capital flight for a large set of developing countries the outcomes of the analysis show that in most cases political risk variables do have a statistically robust relationship to capital flight once domestic and international macroeconomic circumstances are added at least when the robustness test as proposed by sala i martin is applied we conclude that on the basis of the analysis in this paper we have found support for the hypothesis that political risk leads to increased capital flight

sectoral variability and the foundations of optimal inflation rate abstractthe recent monetary search models argue that the real effects of inflation on economic activity can be gauged through relative price variability rpv our study uses a large panel data of

money and monetary stability in europe 1300 1914 abstract this paper investigates the determinants of monetary stability in europe from the late medieval era until world war i through this period the anchor for monetary policy was the silver or gold value of the monetary unit states however frequently abandoned this anchor some depreciating their monetary units against silver and gold less than 10 fold and others more than 10 000 fold between 1500 and 1914 to understand the determinants of these differences we compile a new and comprehensive monetary history dataset for all major states in europe and test alternative theories we find strong evidence that political factors and in particular fiscal capacity political regime and warfare explain patterns of monetary stability this finding is robust to addressing endogeneity controlling for the instability induced by the mechanics of the monetary system and accounting for the impacts of new monetary technologies and the advent of fiat standard

seigniorage and political instability the importance of seigniorage relative to other sources of government revenue differs markedly across countries this paper tries to explain this regularity by studying a political model of tax reform the model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and thus will rely more heavily on seigniorage this prediction of the model is tested on cross sectional data for seventy countries the authors find that after controlling for other variables political instability is positively associated with seigniorage copyright 1992 by american economic association

loss of monetary discretion in a simple dynamic policy game abstract we analyze a simple policy game featuring monetary credibility problems and argue that loss of monetary discretion is not advantageous two elements form the basis of our analysis firstly we endogenize the source of credibility problems and secondly we consider a dynamic framework where credibility problems are not time invariant by doing this we are able to demonstrate that credibility problems are temporary and in steady state the government has removed these through sound policies a binding policy rule will only serve as an obstacle towards this steady state

partially independent central banks politically responsive governments and inflation theories of central bank independence have more exact implications regarding inflation in different political economic environments than generally understood or empirically examined they imply that inflation in any given country time will be a weighted average of what it would be if the central bank completely controlled monetary policy and what it would be if the government completely controlled it with the degree of central bank independence weighting the former an equation embodying this theoretical expectation is estimated by constrained least squares from a time series cross section of inflation rates in developed democracies since the bretton woods era the results confirm that the antiinflationary benefit of central bank independence is not constant but rather depends on every variable in the broader politicaleconomic environment to which wholly autonomous central banks and governments would respond differently conversely the inflationary impacts of all such political economic variables depend on the degree of central bank independence

governance structures and the durability of economic reforms evidence from inflation stabilizations abstract this paper investigates the relationship between a country s political economic and institutional environment and its ability to implement sustainable economic reform programs the policy issue on which the study focuses is inflation stabilization it consists principally of econometric estimations of the relationship between the success of stabilizations in a large sample of countries and several political and economic explanatory variables the hypotheses tested are drawn both from the recent macroeconomic literature on policy credibility and from political science the major findings include the following 1 a despite the conventional wisdom to the contrary political repression does not appear to be an effective means for implementing sustainable stabilization policies durable economic reforms and political freedoms appear to be complementary 2 b as has been previously argued theoretically and demonstrated empirically political instability is detrimental to policy reform 3 c the political will and popular consensus for stabilization policies are enhanced during a severe economic crisis 4 d there is weak evidence that intervention by the international monetary fund rather than supporting reform programs can undermine their credibility

decentralization and inflation commitment collective action or continuity do political and fiscal decentralization make it easier or harder to control inflation statistical analysis of average annual inflation rates in a panel of 87 countries in the 1970s and 1980s found no clear relationship between decentralization and the level of inflation political decentralization however does appear to reduce change in countries relative inflation rates over time by creating additional veto players federal structure may lock in existing patterns of monetary policy whether inflationary or strict among the mostly developed countries that started with low inflation inflation tended to increase more slowly in federations than in unitary states among the mostly developing countries that started with high inflation inflation tended to increase faster in the federations there is evidence that political decentralization locks in a country s degree of practical central bank independence whether high or low and the relative hardness or softness of budget constraints on subnational governments

random interactions in the chamber legislators behavior and political distance abstract i investigate the role of social interaction among members of parliament mps and the impact of such interaction on the political distance between parties using the random allocation of seats in the icelandic parliament i find that mp s voting and speech behaviors are affected by the behavior of legislators seated nearby i also show that greater random exposure to mps from different parties ultimately reduces the political distance between parties similar evidence is found using historical data for the u s house of representatives by exploiting the introduction of a lottery mechanism to determine desk assignments in 1845 i argue that random seating arrangements could constitute a low cost way of reducing differences within the political arena

political shocks and public debt the case for a conservative central bank revisited abstract we explore the dynamics of public debt and optimal institutions in the presence of political shocks arising from electoral uncertainty under commitment optimal stabilization is established by combining an inflation target with a debt target the inflation target should be contingent on the political shocks while the debt target forces the government to fully absorb the political shocks in the period in which it occurs in the absence of such inflation and debt targets but with monetary commitment a conservative central bank enhances stabilization an even more conservative central bank is optimal if monetary policy cannot commit

take the money and run political turnover rent seeking and economic growth abstract we find a negative and significant relationship between gubernatorial turnover and u s state economic growth although our finding of an inverse relationship between growth and political instability may seem to contradict olson s 1982a famous hypothesis regarding the growth retarding nature of political stability such constitutional political changes were not primarily what olson had in mind we argue that enhanced political turnover is associated with more rent seeking since payoffs to focusing on special interest redistributive policies vs general growth enhancing ones are greater for less durable regimes therefore we interpret our evidence as supportive of olson s broader argument concerning the negative affect of rent seeking behavior on growth

emergence and persistence of inefficient states we present a theory of the emergence and persistence of inefficient states based on patronage politics the society consists of rich and poor the rich are initially in power but expect to transition to democracy which will choose redistributive policies taxation requires the employment of bureaucrats by choosing an inefficient state structure the rich may be able to use patronage and capture democratic politics so reducing the amount of redistribution in democracy moreover the inefficient state creates its own constituency and tends to persist over time intuitively an inefficient state structure creates more rents for bureaucrats than would an efficient one when the poor come to power in democracy they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats anticipating this when the society starts out with an inefficient organization of the state bureaucrats support the rich who set lower taxes but also provide rents to bureaucrats we obtain that the rich bureaucrats coalition may also expand the size of bureaucracy excessively so as to generate enough political support the model shows that an equilibrium with an inefficient state is more likely to arise when there is greater income inequality when bureaucratic rents take intermediate values and when individuals are sufficiently forward looking jel p16 h11 h26 h41

financial opening and development evidence and policy controversies this paper outlines possible channels linking commercial and financial openness this inquiry is motivated by a salient feature of the global economy in recent decades the embrace by developing countries of financial reforms the adjustment process to the growing financial integration has been rocky frequently associated with financial crises these developments have led to a spirited debate concerning the wisdom of unrestricted capital mobility between oecd and emerging market countries various studies have identified circumstances in which unlimited capital mobility may be suboptimal this paper argues that notwithstanding the above debate the strongest argument for financial opening may be the pragmatic one like it or not greater trade integration erodes the effectiveness of restrictions on capital mobility hence for successful emerging markets that engage in trade integration financial opening is not a question of if but of when and how some insight into the possible linkages between financial and trade opening is obtained by looking at the patterns of changes in openness in the last 30 years in order to evaluate the statistical significance of the association between financial and trade openness i apply a panelregression methodology the units of observations are nonoverlapping five year changes in the openness measures throughout 1969 1998 for all countries subject to data availability table 1 presents the regressions where the dependent variable is the change in financial openness the explanatory variables are changes in trade openness and changes in the level of gdp per capita allowing for country fixed effects regression i reports all developing countries subject to data availability regression ii excludes from the sample developing economies countries that are characterized by financial openness that exceeds 100 percent or by trade openness that exceeds 60 percent and small island economies finally regression iii deals only with the oecd countries the first two regressions indicate a highly significant positive association between changes in financial and commercial openness in developing countries this effect in the oecd countries is positive but at a substantially lower significance level in aizenman and ilan noy 2003 annual data are used to investigate the impact of political economy and other structural variables on the links between trade and financial openness an extended version of our model where political economy considerations determine the efficiency of the tax system suggests that democracies are associated with lower financial openness our empirical investigation 317 social sciences 1 department of economics university of california santa cruz 1156 high st santa cruz ca 95064 and nber e mail jaizen ucsc edu i thank shang jin wei for sharing the data on financial openness and ilan noy and bill koch for excellent research assistance useful comments by mike dooley michael hutchison phil mccalman graciela kaminsky and ken kletzer are gratefully acknowledged 1 a useful survey of financial liberalization is john williamson and molly mahar 1998 see carlos diaz alejandro 1985 dani rodrik 1999 and thomas hellmann et al 2000 for skeptical assessments of the gains from financial liberalization for studies dealing with the financial instability associated with capital account opening see the papers in sebastian edwards and jeffrey frankel 2002 on the association between financial integration and financial crises see asli demirguc kunt and enrica detragiache 1998 guillermo calvo 1998 and graciela kaminsky and carmen reinhart 1999 2 financial openness measures gross private capital inflows gross private outflows 100 gdp using the data documented and applied by shang jin wei and yi wu 2002 and eswar prasad et al 2003 trade openness measures exports imports 100 gdp using the world development indicators wdi data 3 the inclusion of gdp per capita as an explanatory variable is suggested by the linkages between gdp per capital level and financial depth 4 following the approach of alex cukierman et al 1992 one expects less polarized societies and better functioning democracies to be characterized by more efficient taxcollection systems applying this conjecture a more efficient tax system would be associated also with lower tax

presidential address institutions and culture how and why does distant political and economic history shape the functioning of current institutions this paper argues that individual values and convictions about the scope of application of norms of good conduct provide the missing link evidence from a variety of sources points to two main findings first individual values consistent with generalized as opposed to limited morality are widespread in societies that were ruled by non despotic political institutions in the distant past second well functioning institutions are often observed in countries or regions where individual values are consistent with generalized morality and under different identifying assumptions this suggests a causal effect from values to institutional outcomes the paper ends with a discussion of the implications for future research jel a10 d7 e00

who is afraid of political instability abstract an unstable macroeconomic environment is often regarded as detrimental to economic growth among the sources contributing to such instability much of the blame has been assigned to political issues this paper empirically tests for a causal and negative long run relation between political instability and economic growth but finds no evidence of such a relationship sensitivity analysis indicates that there is a contemporaneous negative relationship but also that in the long run and ignoring institutional factors the group of african countries plays the determining role

inflation targeting and switch of fiscal regime in new zealand monetary policy cannot be adequately addressed without also specifying fiscal policy i interpret the economic reforms in new zealand in the 1980s using a simple model that includes reaction functions of both monetary and fiscal policy the interpretation is based on the wealth effects of the government debt the successful and sustainable shift in monetary policy regime in new zealand was supported by a compatible switch in fiscal policy

macroeconomic volatility trade and financial liberalization in africa this paper examines the effects of financial and trade liberalization on growth volatility of real output and consumption in africa our results suggest trade liberalization is associated with greater output and consumption growth volatility while financial liberalization increases the efficacy of consumption smoothing and stabilizes income and consumption growth in addition we find financial market depth and institutional quality operate jointly with trade and financial openness to reduce volatility in output and consumption growth there is also evidence that good institutions which foster low inflation levels and volatility promote consumption and output growth stability