Partisanship in the setting and coordination of fiscal and monetary policies

Abstract. The principal concerns of this paper are with the roles partisan politics have played in the making of fiscal and monetary policies within OECD countries as well as the extent to which these policies have complemented each other. It is argued that parties of the left pursue fiscal policies that are distinctly different from those pursued by the right. The critical difference is in the way these parties use fiscal policy as a corrective mechanism for dealing with macroeconomic problems: leftist parties adopt counter–cyclical fiscal policies while rightwing parties adhere to pro–cyclical fiscal stances. The paper also examines two arguments regarding monetary policy and how partisan politics affect this policy area. The first and most conventional argument sees the formal independence of the central bank from government as a means of negating partisan influences on monetary policy; the second advances the proposition that, regardless of central bank independence, monetary authorities are not politically neutral but instead share views similar to those of parties on the right–hand side of the political spectrum. Empirical analysis, using a pooled cross–section time–series design with data from 14 countries between 1961 and 1994, produces evidence in favor of the argument concerning the role of partisanship in fiscal policy; it also shows little support for the view that central bank independence inhibits partisan influences while at the same time provides support for the thesis that central banks are politically non–neutral. Thus, coordination between fiscal and monetary policies is far less likely to occur when left–wing parties are in power.     

Partisanship in the setting and coordination of fiscal and monetary policies

The principal concerns of this paper are with the roles partisan politics have played in the making of fiscal and monetary policies within OECD countries as well as the extent to which these policies have complemented each other. It is argued that parties of the left pursue fiscal policies that are distinctly different from those pursued by the right. The critical difference is in the way these parties use fiscal policy as a corrective mechanism for dealing with macroeconomic problems: leftist parties adopt counter–cyclical fiscal policies while rightwing parties adhere to pro–cyclical fiscal stances. The paper also examines two arguments regarding monetary policy and how partisan politics affect this policy area. The first and most conventional argument sees the formal independence of the central bank from government as a means of negating partisan influences on monetary policy; the second advances the proposition that, regardless of central bank independence, monetary authorities are not politically neutral but instead share views similar to those of parties on the right–hand side of the political spectrum. Empirical analysis, using a pooled cross–section time–series design with data from 14 countries between 1961 and 1994, produces evidence in favor of the argument concerning the role of partisanship in fiscal policy; it also shows little support for the view that central bank independence inhibits partisan influences while at the same time provides support for the thesis that central banks are politically non–neutral. Thus, coordination between fiscal and monetary policies is far less likely to occur when left–wing parties are in power.     

中国财政政策对居民消费需求的非对称效应——基于流动性约束视角下一个新的分析框架

政府运用财政政策扩大居民消费需求,除了需要科学抉择政策取向之外,政策力度和节奏的把握也非常关键。本文在Tagkalakis研究的基础上,首先提出了中国财政政策对居民消费非对称性效应研究的理论框架,然后建立财政政策冲击对居民消费影响的经济计量分析模型,利用1999—2009年中国省际面板数据估计了政府消费冲击、税收冲击以及预期可支配收入对居民消费的影响,并在此基础上进一步考察流动性约束在财政政策冲击对居民消费产生非对称性影响中的作用。实证结果表明财政政策冲击在好与坏两个时期之间对居民消费产生了显著的非对称性凯恩斯效应。其中在坏的时期,政府消费冲击与税收冲击对居民消费影响效应的绝对幅度相对较大。虽然国外理论界认为非对称性效应产生的原因复杂,本文认为在我国财政政策冲击对居民消费产生非对称性效应的原因中,流动性约束起到了非常重要的作用。另外,预期可支配收入因是否面临流动性约束而对不同类型消费者的消费需求影响发生方向性改变。     

Political budget cycles and election outcomes

This paper addresses two empirical questions. Is fiscal policy affected by upcoming elections? If so, do election-motivated fiscal policies enhance the probability of re-election of the incumbent? Employing data for 65 democratic countries over 1975–2005 in a semi-pooled panel model, we find that in most countries fiscal policy is hardly affected by elections. The countries for which we find a significant political budget cycle are very diverse. They include ‘young’ democracies but also ‘established’ democracies. In countries with a political budget cycle, election-motivated fiscal policies have a significant positive (but fairly small) effect on the electoral support for the political parties in government.     

Fiscal Policy Cycles and Public Expenditure in Developing Countries

The paper studies empirically the fiscal policy instruments by which governments try to influence election outcomes in 24 developing countries for the 1973–1992 period. The study finds that the main vehicle for expansionary fiscal policies around elections is increasing public expenditure rather than lowering taxes, and public investment cycles seem particularly prominent. Institutional mechanisms which constrain discretionary expenditure policies and which strengthen fiscal control are therefore worthwhile considering to prevent opportunistic policy making around elections.     

Balancing Cities' Books in 1992: An Assessment of City Fiscal Conditions

Cities, like states, have faced serious fiscal challenges and decisions during the economically strained 1992 year. This article is an analysis of cities' fiscal situation and policies of 1992. Specifically, cities' fiscal status, varied coping fiscal policy actions, and the relation between ending balances and fiscal policy are addressed.     

税收、财政支出政策与宏观经济运行的内在影响机制——基于中国不同省份的面板数据分析

财政政策对经济运行的影响是宏观经济研究的核心问题.但相关文献都侧重于财政支出、税收等对宏观经济的单方面影响.本文构建了基于财政支出、税收的内生经济增长模型.从模型推导可知,在给定税收、财政支出政策的变化路径时,税率与经济增长存在"倒-U"型关系,政府投资性支出与经济增长之间正相关,社会福利不仅与政府支出规模有关,还受到其支出结构的影响.实证检验显示,在我国经济运行中,总产出、消费、投资、政府支出、税率、利息率、工资水平之间存在长期均衡关系,且存在最优宏观税率,政府投资性支出对经济增长率存在正向影响,但对社会福利的影响存在不确定性,且在不同经济区域上存在较大差异性.这说明财政支出、收入政策的稳定性,差异性的区域税收制度安排和政府支出结构,有利于不同区域经济发展.     

Regional fiscal cooperation in metropolitan areas: An exploration

This article explores the potential benefits and costs of regional cooperation on metropolitan area fiscal policies. After discussing the relationships between cities and suburbs, as well as the role of local fiscal policies in regional well‐being, the article presents and tests a model for measuring benefit spillovers resulting from fiscal policies. The results show that state and local infrastructures have important effects on metropolitan property markets, and that current spending is less influential than the level of public capital in place in determining property values. State highway investments are found to reduce the attractiveness of metropolitan area locations. Enhancements to central city infrastructure are estimated to significantly increase suburban property values, and the results of some simple policy experiments are examined.© 1999 by the Association for Public Policy Analysis and Management.     

中国地方财政稳定机制研究

传统财政理论认为,中央政府是稳定政策唯一合适的承担者,然而,Gramlich得出地方政府的财政政策至少在短期内是有效的结论,并提倡地方政府实施稳定的财政政策。本文利用1995—2008年中国30个省、市、自治区(西藏除外)的财政收支面板数据和GDP面板数据,运用固定效应模型和Prais-Winsten PCSE方法实证分析了地方财政收支行为与宏观经济波动的关系,得出在宏观经济处于繁荣阶段时,地方财政收支违反了"逆周期"操作规则,是"顺周期"的结论。认为,地方政府职能转变不到位,财政纪律松弛,财政约束缺失,以及《预算法》的缺陷是导致"顺周期"的原因。为此,本文最后提出了通过建立地方财政预算稳定基金和中期预算制度,修订预算法等相关措施来构建中国地方财政稳定机制的设想。     

A FRAMEWORK FOR THE ANALYSIS OF SOCIAL REGULATION

The emphasis of this paper is on the development of a framework for analyzing the impacts of governmerit intervention on issues of public health and safety. Government policies are classified into three general strategies: regulatory, fiscal, and educational. In most issues, governments pursue policies in all three categories. The authors explain how the effects not only of specific policies, but also of these general policy types can be assessed over the range of social issues. The conceptual framework is tested with regard to a particular issue–alcohol-related traffic accidents–across the American states from 1979-1 984. The results suggest that fiscal and educational policies had little effect, but certain of the regulatory policies tended to be related to traffic fatalities involving alco- hol. The empirical analysis demonstrates the utility of the conceptual framework presented.     

Rational Ignorance,Rational Voter Expectations,and Public Policy: A Discrete Informational Foundation for Fiscal Illusion

This paper demonstrates that rational ignorance, properly defined, allows the possibility that fiscal illusion affects policies in a democracy. The implications of rational ignorance are examined in a setting where voters are assumed to completely understand the fiscal environment and make perfect use of any information that they possess. In this setting, it is demonstrated that ignorance may be rational, manipulated, and generate biased expectations over fiscal parameters. The analysis suggests that the electoral impact of voter ignorance is reduced, but not eliminated by electoral competition. Candidate positions only affect the electoral choices of individuals who are at least partially informed about those positions. Consequently electoral competition tends to generate policies that advance the interests of relatively informed voters. This implies that election based public policies are based upon better information than one would expect based on the widespread fiscal ignorance reported in surveys. However, even in this setting, the votes cast and the policies adopted are affected by the estimated marginal rates of substitution between private and governmental services which can not be unbiased if areas of ignorance remain — even if voters make the very best use of information in their possession. The existence of rational ignorance, once carefully defined, is sufficient to generate policy relevant fiscal illusion.     

Recognition of innovation and diffusion of welfare policy: Alleviating urban poverty in Chinese cities during fiscal recentralization

This article explores the complicated triangular architecture among innovation diffusion, fiscal recentralization, and authoritarian welfare regimes. We argue that local governments' adoption of innovative welfare policies attracts the attention of central authorities who tend to recognize spontaneous local innovation by releasing central administrative signals. During the era of fiscal recentralization starting from the Chinese Tax‐Sharing System Reform in 1994, cities with higher fiscal dependency are more likely to behave innovatively by adopting a new welfare policy for potential fiscal transfer rewards. The central government's recognition of this innovation stimulates cities' adoption but would reverse the effects of fiscal dependency because of the loss of the “innovativeness” of the adoption and its effectiveness in attracting the attention of superior authorities. We test our theories on the dynamic diffusion with the case of China's Urban Minimum Living Standard Assistance system, an urban poverty‐alleviation policy implemented fully in 1999.     

Budgeting for Fiscal Stability over the Business Cycle: A Countercyclical Fiscal Policy and the Multiyear Perspective on Budgeting

This essay is a theoretical exploration of a new budgetary system to cope with fiscal uncertainty and instability. ¹ It examines policies requiring positive year-end balances and infers that annual budget cycles lead to a mismatch between the budget cycle and the continuity of public service provision. The author considers a multiyear perspective on budgeting as a potential solution, with countercyclical fiscal reserves to help ensure stability during fluctuating economic conditions. By adopting budget stabilization funds and keeping sufficient reserves, states can better maintain trend-level public services during recessions. Panel data analysis provides empirical evidence that such funds helped stabilize state general expenditures during downturns. The adoption of countercyclical fiscal policy and budget stabilization funds is a step toward a longer-term perspective on budgeting, thus promoting fiscal stability over the economic cycle.     

Government Partisanship and Managing the Economy: Japan and Sweden in Comparative Perspective

It is generally taken for granted that countries governed by leftist governments expand social policies and have an affinity for active fiscal policy that implies higher tolerance of deficit‐ridden budgets. In contrast, conservative governments are taken to be less likely to favor welfare expansion, especially when it has negative fiscal consequences. We challenge this conventional wisdom by comparing the reactions of the Swedish and Japanese governments to economic crises during the 1990s. The puzzle is that the Social Democratic governments in Sweden were able to reduce ballooning budget deficits and thus bring the economy back into balance, while still having one of the largest public sectors in the developed world. In contrast, the conservative Liberal Democratic Party governments in Japan have been unable to redress their deficit problems despite having one of the smallest public sectors among the Organisation for Economic Co‐operation and Development countries. We argue that this can be explained by taking into consideration that governments’ tax and spending policies are influenced by bureaucratic structures and institutionally driven public beliefs. By comparing Japan and Sweden, we show how political parties actively seek to make their policy stances permanent by structuring taxation and expenditure policies to create institutionalized support for their policy preferences.     

General-Purpose Aid in New York State: Targeting Issues and Measures

This article explores key questions about targeted versus distributiveaid policies within the context of New York's general-purposestate aid program. Development of that program over the pastforty years shows ebbs and flows of support for both targetedand distributive approaches. Intense policy debates concerninglocal fiscal policies occur as part of annual state budget negotiations,although recently, New York policymakers have favored targetedapproaches. Yet the traditional measures of targeting governmentalneeds, such as differences in fiscal capacity and effort, havebeen expanded to emphasize differences in service responsibilities.Strong, and perhaps ironic, parallels are also evident betweenNew York's program and the now defunct federal revenue sharingprogram.     

Generational accounting and intergenerational welfare

We investigate the intergenerational welfare implications of Generational Accounting when it is used as the basis for intertemporal fiscal policy decisions. In particular, we consider an economy with a PAYGO social security system out of steady state due to a permanent fall in fertility. In a highly stylized CGE overlapping generations model we illustrate that policy recommendations based on a standard application of Generational Accounting may not be compatible with intertemporal welfare maximization. Our model provides an example where such policies are either time inconsistent or welfare-decreasing.     

The Politics of Fiscal Responses to the Crisis of 2008–2009

The national fiscal responses to the economic crisis of 2008/2009 varied considerably. Some countries reacted with a strong demand stimulus, others intended to slash public expenditures, while a third group pursued mildly expansionary policies. There are strong reasons for governments to pursue a mildly expansionary policy. If governments depart from this default strategy in favor of a significant counter‐cyclical policy, they must be able to swiftly make decisions. Therefore, effective use of counter‐cyclical policy will be unlikely in cases where lengthy negotiations or significant compromises between governing parties with different views on economic and fiscal policy are likely. Therefore, a major determinant of the expansionary strategy is a unified government, usually in form of a one‐party government. If governments opt for pro‐cyclical policy in a major economic crisis, they do so because they have few other viable options. In this situation they tend to shift blame to international organizations.     

Do citizens care about government debt? Evidence from survey experiments on budgetary priorities

Ever since the Great Recession, public debt has become politicised. Some research suggests that citizens are fiscally conservative, while other research shows that they punish governments for implementing fiscal consolidation. This begs the question of whether and how much citizens care about debt. We argue that debt is not a priority for citizens because reducing it involves spending and tax trade-offs. Using a split-sample experiment and a conjoint experiment in four European countries, we show that fiscal consolidation at the cost of spending cuts or taxes hikes is less popular than commonly assumed. Revenue-based consolidation is especially unpopular, but expenditure-based consolidation is also contested. Moreover, the public has clear fiscal policy priorities: People do not favour lower debt and taxes, but they support higher progressive taxes to pay for more government spending. The article furthers our understanding of public opinion on fiscal policies and the likely political consequences of austerity.     

Interdependenz und ideologische position: Die konditionale Diffusion der Zigarettenbesteuerung in den US-amerikanischen Bundesstaaten 1971–2006

This paper inquires into the interdependence of cigarette taxation in the US states between 1971 and 2006. It is argued that diffusion influences emanating from the tax policies of other states have an effect that is conditional upon the government ideology in a focal state. Specifically, it is shown that only those state governments that are not positioned on the far right end of an ideology continuum use an environment of high cigarette taxes to pursue their fiscal and health policy goals. At the same time, interventionist ideology can only be effective if it operates within a favorable policy environment. I argue that casting policy diffusion as conditional allows for empirically more accurate and theoretically richer models.     

Budget Process Reform: Waiting for Godot

The unraveling of the budget process described by Irene Rubin will have extraordinary consequences for the long-term budget outlook facing the nation. The retirement of the baby boom generation will prompt unprecedented and unsustainable structural fiscal imbalances for decades to come. Early policy action on the spending and revenue sides of the budget is critical to avert fiscal and economic crisis and to phase in changes in order to avoid precipitous and politically perilous actions in the future. Yet such actions constitute what amounts to a politically unnatural act, as one generation of political leaders is asked to make sacrifices in current policies benefiting future generations. Budget process reforms can serve to highlight the salience of these issues and help deal with the significant political hurdles faced by decision makers in making these intertemporal budgeting trade-offs. Ironically, the need for budget rules and processes has intensified as policy makers have become more vulnerable to polarized political parties, ever more watchful media, and mobilized interest groups. Budget rules and processes can help policy makers cope by protecting their ability to make the hard choices that will be necessary. The pressures for budget process reform will accelerate as the current financial crisis increases near-term budgetary pressures, promoting greater alignment between near-term and long-term fiscal problems.