A Theory of Political and Economic Cycles / Laurence Ales, Pricila Maziero, Pierre Yared.

Format:

Book

Author/Creator:

Ales, Laurence.

Contributor:

National Bureau of Economic Research.

Maziero, Pricila.

Yared, Pierre.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18354.

NBER working paper series no. w18354

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

We develop a theoretical framework in which political and economic cycles are jointly determined. These cycles are driven by three political economy frictions: policymakers are non-benevolent, they cannot commit to policies, and they have private information about the tightness of the government budget and rents. Our first main result is that, in the best sustainable equilibrium, distortions to production emerge and never disappear even in the long run. This result is driven by the interaction of limited commitment and private information on the side of the policymaker, since in the absence of either friction, there are no long run distortions to production. Our second result is that, if the variance of private information is sufficiently large, there is equilibrium turnover in the long run so that political cycles never disappear. Finally, our model produces a long run distribution of taxes, distortions, and turnover, where these all respond persistently to temporary economic shocks. We show that the model's predictions are consistent with the empirical evidence on the interaction of political and economic cycles in developing countries.

Notes:

Print version record

September 2012.