Political Influences on Monetary and Fiscal Policy
Political Influences on Monetary and Fiscal Policy
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Date
2004-04-29
Authors
Eslava, Marcela
Advisor
Drazen, Allan
Citation
DRUM DOI
Abstract
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.