Macroeconomic Policies (VP Chap.8)

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MACROECONOMIC POLICIES
VETO PLAYERS, CHAPTER 8
Alessandro Magri
February 12th 2013
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.
Topics
1. Budget deficits.
2. Composition of budgets.
3. Effects of veto players on growth, taxation, inflation.
1. Budget deficits:
collective action vs. inertia explanation
• Why do some countries “stabilize” their
policies and reduce their deficits faster than
others?
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.
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).
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.
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).
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 fiscallyalluded voters; the central bank autonomy and reduction of
debt financing.
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.”
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.
25% Debt as Percent of GDP seems to
Be the threshold value
Over 25% 1 more government party means more inaction,
more deficit; Under 25% means more inaction less deficit
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)
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.
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.
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.
Negative effects of IDs on the change of budgets
TABLE 8.1
Estimated Results on Budget Structure in 19 OECD Countries, 1973-1995 (simple model estimated by
multiplicative heteroskedastic regression).
MODEL 1
MODEL 2
Dependent Variable: The Expected Value of Budget Distance
Constant
Lagged BD
Ideol. Distance
.2746***
(.0198)
.1503***
(.0349)
-.0189
(.0168)
Dependent Variable: The Error Term of Budget Distance
Constant
-2.5671***
(.0776)
Ideol. Distance
-.2087***
(.0883)
N
338
Prob > ? 2
0.000
.2820***
(.0201)
.1360***
(.0351)
-2.524***
(.0769)
338
0.000
Note: Standard errors in parenthesis.
* significant at 10%; ** significant at 5%; *** significant at 1%, all tests are one-tailed.
Introduction of control variables
Table 8.2
Estimated Results on Budget Structure in 19 OECD Countries, 1973-1995 (Complete Model Estimated by Fixed-Effect CrossSectional Time-Series Model with Panel Correction Standard Errors).
MODEL 1 Coefficient
MODEL 1 Stand. Coefficient
MODEL 2
Lagged 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
336
R2
65.32%
65.32%
65.21%
* significant at 10%; ** significant at 5%; *** significant at 1%, all tests are one-tailed.
How the ID and A affect budget structure in a disaggregated level
TABLE 8.3
Estimated Results for Each Budget Category
BUDGET CATEGORY
IDEOLOGICAL DISTANCE
General Public Services
-.0895 (.0526)**
Defense
-.0157 (.0245)
Education
-.1242 (.0735)**
Health
-.2550 (.1076)***
Social Security and Welfare
-.2915 (.1082)***
Housing and C. Amenities
.0224 (.0468)
Other C. and S. Services
-.0125 (.0130)
Economic Services
-.1574 (.1301)*
Others
-.2156 (.1728)*
Note: Estimated coefficients for country dummies, change in unemployment
rate 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.
ALTERNATION
.0118 (.0334)
.0176 (.0136)*
.0433 (.0320)*
.1566 (.0584)***
.0965 (.0724)*
-.0193 (.0399)
.0044 (.0060)
.0602 (.0528)
.0883 (.1014)
The two-dimensional model outperforms the one-dimensional
model
3. Other macroeconomic outcomes
• Veto players theory: significant changes of
outcome will be associated only with few and
ideologically congruent VPs.
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”.
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.
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.
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.

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