Political Influences on Monetary and Fiscal Policy

Thumbnail Image
umi-umd-1415.pdf(1.02 MB)
No. of downloads: 1928
Publication or External Link
Eslava, Marcela
Drazen, Allan
This dissertation studies the influence of some political factors on economic policy. Chapter 1 studies the choices of central bankers when: (i) central bankers are government appointees; (ii) monetary policy is decided by a committee. In this framework each central banker faces incentives to protect the Central Bank's reputation and incentives to show loyalty to the government in order to be reappointed. I show that collective policy-making can be better than having a single central banker at achieving low inflation and isolating policy from government pressures, because the committee can reduce the relative value central bankers assign to reappointment. For this to hold, the committee must be small so that each member values the impact of his vote on policy, while the rate of turnover of members must be small so that the risk of being replaced for deviating from the government's preferred policy is small. Chapter 2 uses the view that politicians favor the interests of specific groups of voters to explain political budget cycles in a model with rational voters. Voters use past fiscal policy to learn information about which types of spending the incumbent is likely to favor if re-elected. The result is a pre-electoral shift of government resources from non-targeted types of expenditures toward goods specific groups of voters care more about. Pre-electoral transfers are mostly directed to undecided groups of voters. Even though voters are rational and predict this behavior, they respond to electoral manipulation, since they cannot observe whether they are being targeted because they are crucial to the incumbent's re-election or because they are genuinely liked. In chapter 3, I use data on government expenditures and electoral outcomes in Colombia to analyze both voting behavior and the pre-electoral dynamics of government spending. I suggest a correspondence between fiscal data and the conceptual division of expenditures into targeted and non-targeted spending. I find that targeted spending grows and non-targeted spending contracts in the year leading to an election. Consistent with this result, I find that Colombian voters reward pre-election increases in targeted spending, but punish incumbents who run high deficits when the election approaches.