Panos Afxentiou

Electoral and Partisan Cycle Regularities in Canada

In this paper, following recent politico-institutional approaches to the theory of economic policy, the authors present a methodology for identifying political-cycle regularities and test for electoral and partisan cycles in Canadian target variables and (monetary and fiscal) policy instruments using annual data from 1926 to 1994. The empirical evidence suggests the absence of political cycles in Canada.

The Role of Exports

Growth, as a universal phenomenon, has always been one of the central themes of economics since the development of the field into a scientific discipline.1 Its continuous investigation over more than two centuries has brought to light several of its facets without however revealing all its secrets. After a lot of work economists appear to know more about the patterns of growth than about its causes, and after long discussions it is not yet clear whether growth should be viewed as an end in itself, or, in the opinion of an increasing number of advocates of basic needs and entitlements, as a means toward the fulfillment of the human potential.2

Openness in the Canadian economy: 1870–1988

The causal relation between openness and GDP and between exports and imports are examined. Causality test carried out in growth rates showed that over the period 1870–1988 openness, both narrowly and broadly defined, Granger-causes GDP growth; tests for the inverse causality produced mixed results, validating causality from GDP growth to export plus import growth, but rejecting causlaity from GDP growth to export growth; it was also found that export growth causes import growth, but not the opposite. Causality tests over four subperiods indicated the importance of openness for only the earliest phase of Canadian economic development. While the absence of causality in the later subperiods is largely compatible with the experience of the industrial countries, no meaningful comparison can be made between the experience of Canada and that of developing countries owing to causality variations of openness and to large differences in resource endowments.

Monetary Aggregates and Monetary Policy

Recently, there has been renewed interest in the identification of monetary policy disturbances. This involves a search for a variable (or combination of variables) to appropriately measure the stance — the looseness or tightness — of monetary policy. Over the years many variables have been used for this purpose. For example, monetarist authors of the 1960s and 1970s, such as Friedman and Schwartz (1963) and Cagan (1972), emphasized monetary aggregates (like M1 and M2) as indicators of policy. In particular, they argued that such money measures lead output and prices and also are positively related to changes in output (at least in the short run) and to changes in the price level (at least in the long run).

Convergence in Government Spending

Convergence is a process whose end product is the leveling of productivity of the factors of production. In closed economies, this leveling is brought about by the law of diminishing returns, which in open economies is strengthened by transfers of capital and technology from rich countries to poor and by movements of labor from poor countries to rich. Because immigration restrictions prevent free mobility of labor, the anticipated reductions in real per capita income disparities among countries are destined to be determined by movements of capital and technological transfers as outdated capital stocks in lagging countries are replaced by stocks embodying th e most advanced technology (Abramovitz 1986). Whether convergence is working is decided not by whether absolute equality in per capita incomes has been at tained but by the narrowing of disparities of per capita incomes. In other words, convergence is identified as a trend toward homogenization that seldom, if ever, results in complete homogenization. Only under the most extreme and totally unrealistic conditions, such as equal and identical human and natural resource endowments, can complete homogenization and absolute equality of real per capita income everywhere in the world be expected.

The Impact of International Indebtedness on the Import-Export Sectors of Developing Countries

This paper tests the causal relationship between the international indebtedness in the 1970s which was followed by the debt crisis in the 1980s and the import and export flows of developing countries. In the overwhelming majority of cases from a sample of 55 countries facing debt difficulties no evidence of causality was found from indebtedness alone or from its combination with exports to imports, nor from indebtedness to exports. These findings cast serious doubts as to whether the inflows of foreign funds contributed to the economic development or the export orientation of debtor nations. [O1, F34]

Common and Codependent Cycles

The main objective of this chapter is to assess the strength of shared dynamics between Canadian monetary aggregates and prices, nominal income, and real income. The distinctive feature of our contribution is that we test for shared cycles (and when appropriate for codependent cycles) using the recently developed testing procedures by Engle and Kozicki (1993) and Vahid and Engle (1993). Our main objective is to determine the strength of the dynamic relationship between monetary aggregates and prices, nominal income, and real income, judged according to whether they respond in a similar manner to cycle generating innovations. The Engle and Kozicki (1993) and Vahid and Engle (1993) approach provides a stronger and more informative test of cyclical comovements than the previously used Hodrick-Prescott (HP) contemporaneous and cross-correlation analysis.

Conclusions and Epilogue

Recent politico-institutional approaches to the theory of economic policy emphasize the incentives of rational and maximizing policymakers in explaining movements in macroeconomic variables. From these approaches a positive theory of economic policy in alternative institutional environments is developed from which in turn certain normative suggestions regarding political and economic institutional designs are deduced. Central to this perspective is the general assumption that policymakers respond to incentives and constraints just like the rest of the economic agents. As a consequence, the actual policies of government give rise to political cycles which on the basis of the primary motivational force involved are distinguished into opportunistic and partisan cycles.

Electoral and Partisan Cycle Regularities

Recent politico-institutional approaches to the theory of economic policy emphasize the incentives of rational and maximizing policymakers in explaining movements in macroeconomic variables. From these approaches a positive theory of economic policy in alternative institutional environments is developed from which in turn certain normative suggestions regarding political and economic institutional designs are deduced. Central to this perspective is the general assumption that policymakers respond to incentives and constraints just like the rest of the economic agents. As a consequence, the actual policies of government give rise to political cycles which on the basis of the primary motivational force involved are distinguished into opportunistic and partisan cycles.

Government Functions and Policies

Interventionism as a fact of every day life was solidified by mercantilist principles during the period when the British empire was spreading its wings around the globe. Debunking of mercantilism, although masterfully done by Adam Smith, could not be immediately implemented as by that time it became an accepted way of British policy and life. Until the classical economists, exclusively motivated by British interests, finalized their system, the spread of industrial revolution and the concomitant expansion of international trade laid firmly the foundations of the golden era of political economy. As years passed and laissez-faire with its various faces was practiced in industrializing countries, interventionism was losing its steam and public finance was moving away from the centre to the periphery of economic thought. The catastrophic consequences of the Great Depression were the motivating forces behind the development of the Keynesian system, which legitimized government interference and hurled fiscal policy back again into the mainstream of economic theory and policy.