Ohad Raveh

Dutch Disease, factor mobility, and the Alberta Effect: the case of federations

Do reduced costs of factor mobility mitigate Dutch Disease effects to the extent that they are reversed? The case of federations provides an indication they do. We observe resource blessing (curse) effects at the provincial (federal) level, and argue the difference in outcomes stems from the difference in factor mobility costs. We construct a simple tax competition model which shows that if factor mobility costs are sufficiently low, a resourceboom triggers an Alberta Effect that mitigates, and possibly reverses, Dutch Disease symptoms. The paper concludes with empirical evidence for the main implications of the model.

Dutch Disease, Factor Mobility, and the Alberta Effect - The Case of Federations

Do reduced costs of factor mobility mitigate Dutch Disease effects, to the extent that they are reversed? The case of federations provides an indication they do. We observe Resource Blessing effects at the federal-state level (within federations) yet rather Resource Curse ones at the federal level (between federations), and argue the difference in outcomes stems from the difference in factor mobility costs. Through a two-region tax competition model we show that with sufficiently low factor mobility costs a resource-boom triggers an Alberta Effect – where resource abundant regions exploit the fiscal advantage, provided by resource rents, to compete more aggressively in the inter-regional competition over capital, and as a result attract vast amounts of capital – that mitigates, and possibly reverses, Dutch Disease symptoms, so that Resource Curse effects do not apply. Thus, this paper emphasizes the significance of the mitigating role of factor mobility in Dutch Disease theory, and presents a novel mechanism (Alberta Effect) through which this mitigation, and possible reversion, process occurs. The paper concludes with empirical evidence for the main implications of the model.

The Natural Resource Curse and Fiscal Decentralization

Natural resource abundance is a blessing for some countries, but a curse for others. We show that differences across countries in the degree of fiscal decentralization can contribute to this divergent outcome. Using a large panel of countries covering several decades and various fiscal decentralization and natural resource measures, we provide empirical support for the novel hypothesis. We also study a model that combines political and market mechanisms under a unified framework to illustrate how natural resource booms may create negative effects in fiscally decentralized nations.

Political Myopia, Public Debt, and Economic Growth

Can economic growth increase public debt? Previous studies on the debt-growth nexus focused on the effects of debt on growth. We present an opposite perspective by showing that growth can reinforce deficit spending. A political economy model of endogenous public debt indicates that the underlying cause is political short-sightedness induced by reelection prospects. Reelection yields accountability but at the same time shortens incumbents’ time horizon, giving rise to political myopia and the ensuing budget deficit bias. Our model shows that economic growth exacerbates this undesirable effect of reelection. We test the model’s predictions using a panel of U.S. states over the period 1963-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous cross-state variation in political time horizon, and aggregate national TFP shocks that are exogenous to individual states. Our more conservative estimates indicate that over a course of five years, a one standard deviation positive TFP shock induces an increase of approximately

Heterogeneous Vertical Tax Externalities, Capital Mobility, and the Fiscal Advantage of Natural Resources

494 in real per capita public debt in politically myopic states. JEL classifications: H63, C61, H74Can economic growth increase public debt? Previous studies on the debt-growth nexus focused on the effects of debt on growth. We present an opposite perspective by showing that growth can reinforce deficit spending. A political economy model of endogenous public debt indicates that the underlying cause is political short-sightedness induced by reelection prospects. Reelection yields accountability but at the same time shortens incumbents’ time horizon, giving rise to political myopia and the ensuing budget deficit bias. Our model shows that economic growth exacerbates this undesirable effect of reelection. We test the model’s predictions using a panel of U.S. states over the period 1963-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous cross-state variation in political time horizon, and aggregate national TFP shocks that are exogenous to individual states. Our more conservative estimates indicate that overa course of five years, a one standard deviation positive TFP shock induces an increase of approximately

Resource Windfalls and Public Debt: The Role of Political Myopia

494 in real per capita public debt in politically myopic states.

Federal Tax Policies, Congressional Voting, and the Fiscal Advantage of Natural Resources

How do state tax rates respond to federal tax shocks? This paper presents a novel mechanism of heterogeneous vertical tax externalities across state-levels of fiscal advantage, showing that tax increases can be expansionary -- even without their reinvestment. States rich in natural resources have a fiscal advantage in the inter-state competition over production factors which allows them to respond better to increases in federal taxes and, consequently, attract capital from other parts of the nation. We add heterogeneity in fiscal advantage levels to an otherwise standard model of vertical tax externalities and horizontal tax competition. The model shows that, irrespective of federal redistribution, the contractionary effect of a federal tax increase can be overturned in fiscally advantaged states, through an increase in their tax base. Using the case of the U.S., and narrative-based measures of federal tax shocks a-la Romer and Romer (2010), we provide empirical evidence for the various aspects of this mechanism. Specifically, our baseline estimates indicate that, controlling for federal transfers, a 1% increase in the GDP share of capital-related federal taxes at the beginning of a year increases the growth rate of the per capita tax base by approximately 0.7% in high fiscal advantage states at the end of it.

Monetary Policy, Fiscal Federalism, and Capital Intensity

We identify an adverse consequence of natural resource windfalls, which is particularly detrimental in advanced democracies. We construct a political economy model with endogenous public debt under exogenous resource windfall shocks, in which political myopia results from reelection prospects. Reelection-seeking politicians, while more accountable toward their electorate, are also more myopic. The latter effect gives rise to a budget defficit bias, with the ensuing debt build up that is exacerbated by resource windfalls. We find that the positive effect of resource windfalls on debt increases as the restrictions on reelection get laxer. We test the models predictions using a panel of U.S. states over the period 1963-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous cross-sectional and time variation in political time horizon, and geographically-based cross-stated differences in natural endowments interacted with the international prices of oil and gas. The empirical findings corroborate the models predictions. In particular, our baseline estimates indicate that a resource windfall of

Trade Liberalization, Intermediate Inputs, and the Demand for Managers: Evidence from India

1 induces an increase of approximately g14:7 in the public debt of states with no gubernatorial term limits.Can natural resource windfalls increase public debt in democracies? Adopting a political economy perspective, we show that the answer is in the affirmative. Resource windfalls increase both the governments income and wealth. The former mitigates the need to borrow, whereas the latter encourages further borrowing (as it improves its terms), implying an ambiguous pure effect of resource windfalls on debt. Re-election considerations shorten political time horizons and give rise to political myopia. We show that higher political myopia, induced by more stringent (institutional) re-election restrictions, magnifies the wealth effect, turning positive the effect of resource windfalls on debt. We test the models predictions using a panel of U.S. states over the period 1963-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous variation in re-election prospects, and geographically-based cross-state differences in natural endowments. Our baseline estimates indicate that a resource windfall of

Capital-Gender Complementarity

1 induces an increase of approximately