By Jaejoon Woo
One of the main impressive macroeconomic advancements over the last 3 a long time is the increase and endurance of huge monetary deficits in a couple of international locations. regardless of contemporary significant monetary reforms world wide, many nations be afflicted by recurrent huge financial imbalances that frequently mirror loss of financial self-discipline. Why perform a little nations have recurrent economic deficit or volatility difficulties, whereas others don't? What elements are most crucial in explaining cross-country edition in financial results? How are they regarding progress or inflation? This publication provides new, rigorous, theoretical and empirical experiences on those economic matters, and highlights social polarization as a vital organizing precept in a political financial system technique. additionally, it discusses how institutional constraints may well favourably impact financial dynamics within the presence of social polarization.
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Extra resources for The Political Economy of Fiscal Policy: Public Deficits, Volatility, and Growth
Example text
Moreover, the polarization of preference and the discount factor are shown to be the critical conditions for the dynamic negative externality to become operative in a more general two-player common pool games. 2 Fiscal Deficit, Fiscal Volatility and Growth: Social Polarization 22 The intuition behind this result is quite similar to that behind the polarization effect. 20) calls for minister I's spending to be equal to the multiproduct of Ai (or (1A2) for minister 2) and net tax revenue R. For a given shock to tax revenue Ar, minister 1 will claim Ai x A r , while minister 2 will want to increase her favorite spending by (1 — A2) x Ar.
24) where it is assumed that the social planner's discount rate equals the interest rate r. The social planner's solution to this optimization problem can be computed in a way similar to each minister's maximization problem. 25). It is only when two ministers have the same preferences, that is, Ai = A2, that the feedback Nash equilibrium is socially optimal. , no polarization, 0 = 0). Also, the social planner's solution requires that the government budget balance all times. This can be easily checked.
Assuming p = r, therefore, the size of consumption reduction at the steady state would amount to 35 percent of GDP! 3 - / - 1 / theta=0 1 1 1 200 Time Fig. 7. 5%. " Transition dynamics of growth depend crucially on the degree of polarization. When there is polarization {0 > 0), the growth rate of capital stock is also lower than that in the absence of polarization {0 = 0) for all finite periods of time. n, ^ e - « « + 0 - . ) * + (,_^) r2co ^ •$rt r2co where 6o = 0 is assumed for simplicity, and the last term in each equation above is obtained under the assumption of p = r.