macroeconomic policies veto players, chapter 8
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MACROECONOMIC POLICIES VETO PLAYERS, CHAPTER 8. Alessandro Magri February 1 2th 2013. Results shown in this chapter. The importance of the relation between policy stability and outcomes . - PowerPoint PPT PresentationTRANSCRIPT
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MACROECONOMIC POLICIESVETO PLAYERS, CHAPTER 8
Alessandro MagriFebruary 12th 2013
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Results shown in this chapter
• The importance of the relation between policy stability and outcomes.
• The veto players theory enables research not only on single dimension phenomena, but also on multidimensional ones.
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Topics1. Budget deficits.
2. Composition of budgets.
3. Effects of veto players on growth, taxation, inflation.
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1. Budget deficits: collective action vs. inertia explanation
• Why do some countries “stabilize” their policies and reduce their deficits faster than others?
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Collective action approach:the more parties participated in government, the higher the budget
deficits
Reasons:• Sharing of the cost of over-spending between all the
ministries.• Incentives for each ministry to spend more.• n-person prisoners dilemma.
Possible solution:• Completely centralized decision making authority.
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Collective action approach:the more parties participated in government, the higher the budget
deficits
Empirical support:• Kontopoulos and Perroti (2000).• Roubini and Sachs (1989).• Von Hagen and Harden (1995).• Hallerberg and von Hagen (1999).
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Policy inertia approach:more government partners find it more difficult
to change (reduce) the size of the deficit and stabilize
• No consensus to change the status quo.
• Alesina and Drazen (1991): “war-of-attrition” model of delayed stabilization.
• Spolaore (1993): “war-of-attrition” model extended to coalition governments.
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Policy inertia approach:more government partners find it more difficult
to change (reduce) the size of the deficit and stabilize
Empirical support:• Roubini and Sachs (1989).• Poterba (1994), Alt and Lowry (1994).• Krause (2000).
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Franzese’s analysis:an empirical contradiction to the collective action
literature
• Franzese (1999) presents different political economy theories: the government composition and the delayed stabilization theories (“influence theory” and “veto-actor” theories); the wealth and age distributions and the inter-/intra- generational transfer of debt; the electoral and partisan political budget cycles; the strategic manipulation of debt to alter future government policies; the multiple constituencies and distributive politics; the tax structure complexities and fiscally-alluded voters; the central bank autonomy and reduction of debt financing.
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Franzese’s analysis:an empirical contradiction to the collective action
literature
• Then he uses J-tests to compare their predictive power. • “The procedure for J-tests is the following: for two models Z=f(X,*)
and Z=g(Y,*) one estimates first Z=f(X,*) and includes its predictions ̃^Z in the estimation of the second Z=g(Y, ^Z, *). If the coefficient of ^Z is non-significant, then the second hypothesis encompasses the first: there is no additional significant information covered by the first hypothesis. The procedure is repeated by reversing the two theories.”
• Conclusion: “Tsebelis’ (1995) veto-actor conception of fractionalization and polarization clearly dominates the influence conception.”
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Franzese’s analysis:an empirical contradiction to the collective action literature
• In the end, he studies the effects of fractionalization and polarization on the deficit, and he tests the size of the deficit as a function of the size of the debt.
• Conclusion: multiple veto players delay changes to budget deficits regardless whether these deficits are high or low.
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25% Debt as Percent of GDP seems toBe the threshold value
Over 25% 1 more government party means more inaction,more deficit; Under 25% means more inaction less deficit
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2. The structure of budgets
Single dimension approaches:• Bawn: the German case between 1961 and 1989• König and Tröger (2001)
Multidimensional approach:• Tsebelis and Chang (2001)
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The structure of budgets:Tsebelis and Chang
There are two different ways to alter budgets:• Deliberate• Automatic
Control variables (needed to differentiate deliberate and automatic changes):
• Inflation, unemployment, % of dependent population, rate of growth, country dummy variables.
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The structure of budgets:Tsebelis and Chang
• Dependent variable: “changes in the structure of budgets in advanced industrialized countries”.
• The budget of each country is conceptualized as a vector in a n-dimensional Euclidean issue space. It consists of a sequence of percentages allocated to different jurisdictions: (a1, a2,….., an). The difference between two budgets can be represented by the distance between the composition of the budgets of two successive years.
• The dependent variable was derived from the Government Finance Statistics Yearbook of the IMF.
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The structure of budgets:Tsebelis and Chang
• 2 dimensions: 1. Left – right.2. “Pro friendly relations to USSR and anti” (Laver and Hunt, 1992).• Independent variables: ideological distance of the existing veto
players (ID- average of the range of the coalitions in each dimension) and alternation (A- it can be calculated by the Pythagorean theorem).
• Tsebelis and Chang tested whether the differences in the annual composition of the budget of each country were a decreasing function of ID and an increasing function of A.
• They use the characteristics of the current governments.
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Negative effects of IDs on the change of budgets
TABLE 8.1Estimated Results on Budget Structure in 19 OECD Countries, 1973-1995 (simple model estimated by
multiplicative heteroskedastic regression). MODEL 1 MODEL 2Dependent Variable: The Expected Value of Budget Distance
Constant .2746*** .2820*** (.0198) (.0201)Lagged BD .1503*** .1360*** (.0349) (.0351)Ideol. Distance -.0189 (.0168)
Dependent Variable: The Error Term of Budget DistanceConstant -2.5671*** -2.524*** (.0776) (.0769)Ideol. Distance -.2087*** (.0883)N 338 338Prob > ? 2 0.000 0.000
Note: Standard errors in parenthesis.* significant at 10%; ** significant at 5%; *** significant at 1%, all tests are one-tailed.
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Introduction of control variables
Table 8.2Estimated Results on Budget Structure in 19 OECD Countries, 1973-1995 (Complete Model Estimated by Fixed-Effect Cross-
Sectional Time-Series Model with Panel Correction Standard Errors). MODEL 1 Coefficient MODEL 1 Stand. Coefficient MODEL 2Lagged BD 0.0588 (0.0483) 0.0890 (0.0731) 0.0628 (0.0474)*Ideol. Distance -0.0615 (0.0277)** -0.1838 (0.0828)** -0.0620 (0.0278)**Alternation 0.0472 (0.0158)*** 0.1755 (0.0587)*** 0.0477 (0.0158)***? unemployment 0.0304 (0.0204)* 0.0849 (0.0570)* 0.0307 (0.0204)*? age>65 0.0227 (0.1360) 0.0101 (0.0605)?GROWTH 0.0018 (0.0042) 0.0261 (0.0609)? INF 0.0060 (0.0067) 0.0416 (0.0465)Belgium 0.2615 (0.0884)*** 0.2871 (0.0838)***Denmark 0.2783 (0.0514)*** 0.2934 (0.0473)***Finland 0.2906 (0.0764)*** 0.3085 (0.0710)***France 0.2053 (0.0971)** 0.2151 (0.0929)**German 0.1345 (0.0509)*** 0.1505 (0.0374)***Ireland 0.1656 (0.0460)*** 0.1794 (0.0440)***Italy 0.4881 (0.0904)*** 0.5102 (0.0807)***Netherlands 0.2109 (0.0738)*** 0.2239 (0.0698)***Portugal 0.5030 (0.1032)*** 0.5315 (0.0975)***Spain 0.4638 (0.1912)*** 0.4751 (0.1883)***Sweden 0.2515 (0.0607)*** 0.2731 (0.0512)***UK 0.1397 (0.0602)*** 0.1572 (0.0566)***N 336 336 336R2 65.32% 65.32% 65.21%* significant at 10%; ** significant at 5%; *** significant at 1%, all tests are one-tailed.
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How the ID and A affect budget structure in a disaggregated level
TABLE 8.3Estimated Results for Each Budget CategoryBUDGET CATEGORY IDEOLOGICAL DISTANCE ALTERNATIONGeneral Public Services -.0895 (.0526)** .0118 (.0334)Defense -.0157 (.0245) .0176 (.0136)*Education -.1242 (.0735)** .0433 (.0320)*Health -.2550 (.1076)*** .1566 (.0584)***Social Security and Welfare -.2915 (.1082)*** .0965 (.0724)*Housing and C. Amenities .0224 (.0468) -.0193 (.0399)Other C. and S. Services -.0125 (.0130) .0044 (.0060)Economic Services -.1574 (.1301)* .0602 (.0528)Others -.2156 (.1728)* .0883 (.1014)
Note: Estimated coefficients for country dummies, change in unemploymentrate and lagged dependent variable are surpassed to facilitate the presentation.Panel-correction standard errors are in parentheses. * p<0.1, ** p<0.05,*** p<0.01; all tests are one-tailed.
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The two-dimensional model outperforms the one-dimensional model
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3. Other macroeconomic outcomes
• Veto players theory: significant changes of outcome will be associated only with few and ideologically congruent VPs.
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Other macroeconomic outcomes:federalism and inflation
• Treisman (2000) compared three different kind of theories about the relation between federalism and inflation:
1. Commitment: lower inflation is expected in decentralized countries.
2. Collective action: higher inflation is expected in federal countries.
3. Continuity: it’s the veto players theory. Lower changes in inflation are expected in federal countries (where, ceteris paribus, there is an increased number of VPs).
• Conclusions: there is a “strong support for the continuity hypothesis”.
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Other macroeconomic outcomes:taxation and veto players
• Hallerberg and Basinger (1998) tried to identify the cause of the reduction of taxes for both the highest income individuals and the enterprises (in OECD countries, during the 80s).
• They tested variables:1. From the economic literature: capital mobility, trade
dependence, inflation, economic growth.2. From the political science literature: veto players,
partisanship.• Conclusions: the only two variables producing consistent
results for both tax reduction were veto players and real growth.
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Other macroeconomic outcomes:growth and Veto Players
• On the one hand, many veto players create a high level of commitment. This should encourage the growth.
• On the other, a high number of veto players leads to the inability for political response. This could “lock” the system to a bad status quo and discourage the growth.
• Hence, the relation between growth and veto players is not clear.
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Conclusions
• The more veto players and/or the more distant they are, the more difficult is the departure from the status quo.
• This indicates a high stability of outcomes.
• The multidimensional analysis presented in this chapter produced better results than the one-dimensional analysis.