COUNTRY LEVEL ECONOMICS: POLICIES, INSTITUTIONS, AND MACROECONOMIC PERFORMANCE HADI SALEHI ESFAHANI “Macroeconomic Policies and Political Decision-Making” ao Cw 4 Institutions and Macroeconomic Policies ~ MwMACROECONOMIC POLICIES AND POLITICAL DECISION-MAKING @ Do politicians try to manipulate macroeconomic policies for their own political ends? >» You bet! © However, the extent and type of manipulation varies across countries. » It depends on the incentives created by the country's institutions and politics.ECONOMIC STABILITY MAY NOT BE THE POLITICIANS MAIN PRIORITY Government Budget Surplus as Percent of GDP in the Philippines Lee A a _f\ N o V S-1- 0 32 5 A] 6-3 g ee a4 5 5 a , 1 , en 2 8 ¥ @ 8 © 9 ¥ @ x © 9 = @ Aa Ee Sc: SeESBones 2 & sa 5 5 ees GS: See: 2 Se SS Year SeeeeeWorld Development indicators, The World Bank vosious WINE the Bureau of the IndillEEEiemment of ihe Phigpines.ECONOMIC STABILITY MAY NOT BE THE POLITICIANS’ MAIN PRIORITY Government Budget Surplus as Percent of GDP in the Philippines Percent of GDP 2 ¢@3ee8 27 eo388 283 8°89 Pes 2 ces SESS S Sleek eB 2 SAS BP EG ee ey ee Year Seam World Development indicators, The World Bank, valour WINNING jhe Bureau of the Inilllliemment ofthe Phiobines.ECONOMIC STABILITY MAY NOT BE THE POLITICIANS’ MAIN PRIORITY Percentage Change in State Employment around Gubernatorial Elections in the United States 0s 6 4, Change Sate Employment Event year . the number of full-time equivalent natorial election year (+ = 0} This figure graphs the percentage change in state employment positions filled with government funds in each state) around a giEMPIRICAL ASSESSMENT OF MACROECONOMIC POLICIES @ In the case of developed countries, there is empirical evidence of use of ... ... Optimal monetary policy and ... -.. some aspects of optimal fiscal policy. @ The magnitude of countercyclical debt response is significantly larger than that implied by the theory... ... possibly due to stabilization policies, off-budget liabilities, and political motives.EMPIRICAL ASSESSMENT OF MACROECONOMIC POLICIES @ In developing countries, monetary and especially fiscal policies are often pro- cyclical! Institutional and political factors matter. ePOLITICAL ECONOMY OF MACROECONOMIC POLICIES © Key political economy concerns: » Monetary policy may be used to finance deficits or to subsidize credit. » Politicians may channel part of fiscal resources towards particularistic interests to buy support. >» Fiscal policy may suffer from the “tragedy of commons": v Excessive spending and borrowing as different interest groups try to capture more of the budget pool and pay less taxes. » Sustainability problems and credit constraints ¥ Pro-cyclical fiscal policy ———POLITICAL ECONOMY OF MACROECONOMIC POLICIES ® The political setting and fiscal and monetary institutions matter: ¥ > puraitfy vs. proportional representation in electoral systems > Separation of powers vs. flexibility in policymaking > Constraints on policymaking vs. reward for policy performance