José Tavares

FISCAL UNION CONSENSUS DESIGN UNDER THE THREAT OF AUTARKY

Jaime Luque et al. — Wed, 15 Feb 2012 03:09:03 PST

Inspired by the current debate over the future of the monetary union in Europe, this paper provides a simple model for the determination of the conditions of survival of the common good, which requires the creation of an effective fiscal union. We highlight the importance of institutional design and varying decision weights for the enlargement of the space for consensus. Our model deepens the discussion of economic risk and political risk in fiscal federalism, and highlights the related roles of country heterogeneity and institutional design in enlarging the scope for cross country fiscal agreements.

Fiscal Conservatism in a New Democracy: “Sophisticated” versus “Naïve” Voters

Paulo Arvate et al. — Fri, 28 Sep 2007 15:07:11 PDT

We use data from gubernatorial elections in Brazil to test the electoral reactions of “sophisticated” and “naïve” voters to fiscal surpluses. Our results complement Brender and Drazen [Brender, Adi, and Drazen, A., (2005b), “How do budget deficits and economic growth affect reelection prospects? Evidence from a large cross-section of countries”, NBER Working Paper 11862, National Bureau of Economic Research, Cambridge, Massachusetts]: we find no evidence of fiscal illusion while, in some cases, a fiscal surplus may actually increase the probability of reelection.

Government Size versus Government Efficiency in a Model of Economic Growth

Francisca Guedes de Oliveira et al. — Fri, 28 Sep 2007 15:05:08 PDT

Partisanship and Government Size

José Tavares et al. — Fri, 28 Sep 2007 15:03:50 PDT

Political factors have been put forward as explanations for business cycles since the 1970’s. Opportunistic and partisan political parties have been introduced in political business cycle models and the behavior of both types of parties was shown to induce business cycles. Most of those models look at the expenditure or revenue side of government budgets as a whole. We consider the decomposition of government budgets into their main fiscal categories and explore whether partisan differences are important in explaining the different levels (as shares of GDP) of those fiscal categories across countries. Our database comprises most OECD countries ranging from 1970 to 1999. We show that left-wing governments tend to expend more money in all categories but total consumption, non-wage consumption and investment, whereas in the revenue side, left-wing governments tend to collect bigger total amounts with positive and strongly significant effects on social security and other taxes. These results are robust to the use of different ideology indicators.

The Economics of Terrorism: What We Know, What We Should Know and the Data We Need

Fernanda Llussá et al. — Fri, 28 Sep 2007 15:00:53 PDT

Probably, and unfortunately also for the worst reasons, terrorism will be high on the political agenda for years to come. Understanding the motivations of terrorists and terrorist groups and diminishing the occurrence and the effects of violence must be a key element in the response to terrorism. This paper puts forward a broad survey of the economic literature on terrorism, organized in seven different topics: we identify what we think we know, we highlight the key issues that remain to be answered and the data that might illuminate this research effort.

Fiscal Policy and Asset Returns

José Tavares et al. — Fri, 28 Sep 2007 14:59:14 PDT

We analyze the effect of taxes and government spending on quarterly market returns of stocks, government bonds, and corporate bonds. In US data from 1960 to 2000, a one standard deviation increase in the share of tax receipts in GDP has a statistically and economically significant effect on returns, lowering annualized expected returns by 4% and 9% at quarterly and yearly horizons, respectively. Interestingly, the impact of taxes is quantitatively similar for stock and bond returns. These results can partly be explained by the high persistence of taxes so that increases today imply permanently higher tax levels in the future. An increase in government spending has a positive impact on expected returns, but the effect is statistically significant only for bonds at short horizons. Our findings represent a novel test of Ricardian Equivalence using market returns. Fiscal policy shocks account for 3-4% of the variation in unexpected stock returns and 8-10% of the variation in unexpected bond returns. When fiscal and monetary policy are jointly identified, our results remain qualitatively unchanged and the quantitative results are only reinforced. More importantly, we find that fiscal policy is at least as important a source of return variability as is the policy of the Federal Reserve. The findings are surprisingly robust to various system specifications, such as cointegration assumptions and variable choice. Our results strongly suggest that fiscal policy shocks should be given more serious consideration in asset pricing.

Women Prefer Larger Governments: Female Labour Supply and Public Spending

Tiago Cavalcanti et al. — Fri, 28 Sep 2007 14:56:05 PDT

The increase in income per capita is accompanied, in virtually all countries, by two changes in the structure of the economy: an increase in the share of government spending in GDP and an increase in female labor force participation. This paper suggests that the changes in female labor force participation and government size are not just coincident in time, they are causally related. We develop a growth model with endogenous fertility, labor force participation and government size to illustrate this causal link. When government consumption and/or subsidies decrease the cost of performing household chores - including, but not limited to child rearing and child care - an increase in the female market wage leads to an increase in labor force participation by women and a demand for higher government spending. As women make the decision to work outside the home, they increase their demand for services typically provided by the government, such as education and health care, which, in turn, decrease the cost of home and family activities that are overwhelmingly performed by women. We show, for a wide cross-section of developed and developing countries, that higher female participation rates in the labor market are positively associated with larger governments. We investigate the causal link by instrumenting for female labor force participation with the prevalence of contraceptive methods and the relative price of household appliances. Female labor force participation is found to cause an increase in government size, with a 10 percent rise in the former leading to a 6.5 to 9 percent rise in the latter. This effect is stronger for government consumption than for government subsidies and is robust to the country sample, time period, and a set of controls in the spirit of Rodrik (1998).

Portugal: Strategic Options in European Context

Fátima Monteiro et al. — Fri, 28 Sep 2007 03:35:13 PDT

Investir no Futuro - Colaborações Universidade Indústria em Portugal e nos EUA

Francisco Veloso et al. — Fri, 28 Sep 2007 03:31:46 PDT

Can Openness Deter Corruption?

Felipe Larraìn B. et al. — Fri, 28 Sep 2007 03:30:07 PDT

The economics literature provides ample evidence that higher corruption levels discourage FDI inflows. In this paper we address, for the first time, the exact reverse link, i.e., the empirical effect of higher FDI inflows on corruption. Our dataset covers a wide set of countries in the period between 1980 and 2000 and we confront the issue of causality by constructing a new set of instrumental variables that rely on geographical and cultural distance between FDI emitting and receiving countries. FDI as a share of GDP significantly decreases country corruption and the quantitative impact is stronger when we instrument for FDI. The results are extremely robust to the inclusion of other determinants of openness such as trade intensity and average tariff level and the impact of FDI on corruption is of the same order of magnitude as that on per capita income.

The Distribution of Household Income and Expenditure in Portugal: 1980 and 1990

Miguel Gouveia et al. — Fri, 28 Sep 2007 03:28:36 PDT

From 1980 to 1990 Portugal experienced a generalized liberalization of economic activity, due in large part to its 1986 integration in the European Union. This paper studies the changes in the Portuguese distribution of household income and expenditure during this period, using micro-data on household budgets and applying recent developments in statistical inference for Lorenz curves. We find a significant increase in six measures of welfare and an unambiguous decrease in the inequality of the respective distributions. Different explanations for the findings of decreased inequality are discussed.

The Political Economy of Fiscal Adjustments

Alberto Alesina et al. — Fri, 28 Sep 2007 03:27:25 PDT

From the introduction: In this paper we reexamine the research on the economic effects of fiscal adjustments. Not all fiscal consolidations are contractionary: some are and some are not. In particular, we emphasize that the composition of the adjustment matters. We confirm and extend evidence that fiscal corrections relying mostly on spending cuts that are concentrated on government wages and transfers tend to be expansionary, while those relying mostly on tax increases are contractionary. The second and main purpose of the paper is to investigate whether governments that follow tight fiscal policies tend to be replaced in office, or more generally, whether they lose popularity as they cut deficits. The answer to both questions is a loud no. Using data drawn from a sample of nineteen countries in the OECD, we find no evidence of a systematic electoral penalty or fall in popularity for governments that follow restrained fiscal policies.

Democracy and Business Cycles: Evidence from Portuguese Economic History

Miguel Costa-Gomes et al. — Fri, 28 Sep 2007 03:26:05 PDT

The Portuguese Republic of 1910-1926 was characterized by extreme instability in the political and economic spheres. The authoritarian regime that succeeded the Republic claimed legitimacy asserting that democracy naturally implied fiscal and monetary instability. In this paper, we study the Republican period and the Monarchy that immediately preceded it, in order to test three hypotheses as to the roots of instability during the Republic: exceptionally high public expenditure made necessary by participation in the First World War, the Fiscal Hypothesis; expansion of monetary supply and increase in its variability, the Monetary Hypothesis; social and political unrest, facilitated by greater freedom in expressing grievances, the Democracy Hypothesis. Using standard econometric techniques we find strong evidence in favor of the Monetary and the Democracy hypotheses but not in favor of the Fiscal Hypothesis. Moreover, our results support the view that political and monetary instability were mutually reinforcing phenomena. The examination of the two periods, Monarchy and Republic, reveals a strong positive association between political and economic cycles in the later, more democratic period.

How Democracy Affects Growth

José Tavares et al. — Fri, 28 Sep 2007 03:24:50 PDT

This paper introduces a new methodology to examine the empirical relationship between democracy and economic growth. Democratic institutions are assumed to affect growth through a series of channels. We specify and estimate a full system of equations determining growth and the channel variables. Results suggest that democracy fosters growth by improving the accumulation of human capital and, less robustly, by lowering income inequality. On the other hand, democracy hinders growth by reducing the rate of physical capital accumulation and, less robustly, by raising the ratio of government consumption to GDP. Once all of these indirect effects are accounted for, the overall effect of democracy on economic growth is moderately negative. Our results indicate that democratic institutions are responsive to the demands of the poor by expanding access to education and lowering income inequality, but do so at the expense of physical capital accumulation.

Regional Currencies versus Dollarization: Options for Asia and the Americas

Felipe Larraìn B. et al. — Fri, 28 Sep 2007 03:24:04 PDT

This paper undertakes an empirical assessment of Dollarization versus regional currency union as options for the economies of East Asia, South America and Central America. We use summary indicators of bilateral integration to examine the determinants of real exchange rate volatility within each region and between each region and the United States. While Europe is characterized by a high degree of regional integration, there is evidence of increasing integration in East Asia and persistently low integration in the Americas, especially as compared to the levels of bilateral integration vis-à-vis the United States. Our estimates confirm the patterns of regional integration above and reveal substantial regional differences as to the determinants of real exchange rate volatility.

Does Foreign Aid Corrupt?

José Tavares — Fri, 28 Sep 2007 03:23:10 PDT

We estimate the impact of foreign aid on corruption using geographical and cultural distance to the donor countries as instrumental variables to assess causality. Aid decreases corruption. Our results are statistically and economically significant and robust to different controls.

Does Foreign Direct Investment Decrease Corruption?

Felipe Larraìn B. et al. — Fri, 28 Sep 2007 03:22:23 PDT

This paper assesses the effect of openness on corruption, using foreign direct investment (FDI) inflows as a measure of openness, after trade intensity is accounted for. We use a broad cross section of countries over the period 1970 to 1994 and address the issue of causality with a new set of instrumental variables relying on geographical and cultural distance between the FDI exporting and recipient countries. The economics literature has demonstrated that higher corruption levels discourage FDI. Here we study the reverse link, that is, how foreign direct investment impacts corruption. We find that FDI as a share of GDP is significantly associated with lower corruption levels, irrespective of import intensity levels. The quantitative impact of FDI on corruption appears to be of the same order of magnitude as that of per capita GDP.

Institutions and Economic Growth in Portugal: A Quantitative Exploration

José Tavares — Fri, 28 Sep 2007 03:20:50 PDT

This paper presents a broad diagnostic of the level of institutional development in Portugal in the legal, corporate governance and financial systems. A comparative assessment suggests that Portuguese institutions are less developed than their European Union and East Asian counterparts, more developed than Greek institutions and on a level similar to that of Spanish institutions. We use data for a wide cross-section of countries since 1960 and correlate indicators of institutional development with the long-term average growth rate, identifying issues where reform is likely to significantly affect economic growth. We construct three new indices that measure the potential of institutional reform – the impact of reform on growth, the required reform effort and the efficiency of reform index – by taking into consideration the institutional “distance” between Portugal and the European Union. These indices measure, respectively, which reforms have the most payoff in terms of growth, which are “less costly” to undertake and which deliver the most growth per required effort. Our results strongly suggest that in a large number of issues, institutional reform may translate into substantially higher rates of economic growth. Of the ten most promising reforms, six are in the legal area, irrespective of which of the indices is considered. Whereas legal reform is promising at the aggregate and the microeconomic levels, in the financial sector aggregate indicators offer the wider scope for productive reform, while in the corporate governance area it is indices at the micro level that hold the most promise. These results support the view that a comprehensive reform effort is likely to deliver higher rates of growth in Portugal, allowing faster real convergence with the rest of the European Union.

The Open Society Assesses Its Enemies: Shocks, Disasters and Terrorist Attacks

José Tavares — Fri, 28 Sep 2007 03:19:53 PDT

This paper conducts a systematic investigation of the incidence and economic costs of terrorist attacks at the country level. We use newly assembled datasets on terrorist attacks, natural disasters and currency crises to answer three different questions: what are the determinants of terrorism; is there an output cost following a terrorist attack; and is that cost larger or smaller in the case of democracies. We find that rich countries are the most prone to suffer attacks while democracies are, if anything, less vulnerable than other countries. The cost to output of a terrorist attack is quantitatively small and closely associated with the occurrence of an event rather than the number of casualties. Finally, we find robust evidence that a terrorist attack imposes a lower output cost the more democratic a country is.

Does Right or Left Matter? Cabinets, Credibility and Fiscal Adjustments

José Tavares — Fri, 28 Sep 2007 03:19:11 PDT

This paper tests the widely held assumption that left-wing cabinets favor higher public spending and examines whether cabinet ideology affects the persistence of major fiscal adjustments. In a panel of large fiscal adjustments in OECD countries during the last 40 years, we find evidence that left-wing and right-wing cabinets are partisan: the left tends to reduce the deficit by raising tax revenues while the right relies mostly on spending cuts. Our testable hypothesis is that cabinets can signal commitment by undertaking fiscal adjustments in ways that are not favored by their constituencies. In other words, the left gains credibility when it cuts spending while the right becomes more credible when it increases tax revenues. Probit estimates of the determinants of persistence in fiscal adjustments confirm that spending cuts by the left and tax increases by the right are associated with persistent adjustments. The effect is significant for cuts in public spending, public consumption (wage or non-wage), increases in total revenues, direct taxes on businesses and other taxes. We test for the role of several other determinants of persistence, confirming that coalition and majority cabinets are associated with less persistence while periods of high or rising levels of indebtedness favor persistence. The estimates of the impact of ideology and other variables on GDP and its components show that it is the size of the spending cut rather than cabinet ideology that is most important.