Roberto Perotti

Growth, Income Distribution, and Democracy: What the Data Say

This paper investigates the relationship between income distribution, democratic institutions, and growth. It does so by addressing three main issues: the properties and reliability of the income distribution data, the robustness of the reduced form relationships between income distribution and growth estimated so far, and the specific channels through which income distribution affects growth. The main conclusion in this regard is that there is strong empirical support for two types of explanations, linking income distribution to sociopolitical instability and to the education/fertility decision. A third channel, based on the interplay of borrowing constraints and investment in human capital, also seems to receive some support by the data, although it is probably the hardest to test with the existing data. By contrast, there appears to be less empirical support for explanations based on the effects of income distribution on fiscal policy.

Estimating the Effects of Fiscal Policy in OECD Countries

This paper studies the effects of fiscal policy on GDP, prices and interest rates in 5 OECD countries, using a structural Vector Autoregression approach. Its main results can be summarized as follows: 1) The estimated effects of fiscal policy on GDP tend to be small: positive government spending multipliers larger than 1 tend to be the exception; 2) The effects of fiscal policy on GDP and its components have become substantially weaker over time; 3) Under plausible values of the price elasticity, government spending has positive effects on the price level, although usually small; 4) Government spending shocks have significant effects on the nominal and real short interest rate, but of varying signs; 5) In the post-1980 period, net tax shocks have positive short run effects on the nominal interest rate, and typically negative or zero effects on prices; 6) The US is an outlier in many dimensions; responses to fiscal shocks estimated on US data are often not representative of the average OECD country included in this sample.

Political Equilibrium, Income Distribution, and Growth

This paper analyzes the impact of income distribution on growth when investment in human capital is the source of growth and individuals vote over the degree of redistribution in the economy. The model has three main features. First, very different patterns of income distribution are conducive to high growth at different levels of per capita income. Second, growth is associated with an externality whereby investment in human capital by one group increases the productivity of other groups, thus potentially enabling them to invest in human capital. Third, the initial pattern of income distribution and the resulting political equilibrium are crucial in determining whether the transmission of this externality is promoted, in which case growth is enhanced, or prevented, in which case growth is stopped. Using a non-overlapping generations model with voting, I derive several empirical implications. In particular, the model implies an inverted-U relation between levels of inequality and levels of income in cross-sections, but not necessarily in time series, a result that seems consistent with a number of empirical studies.

Fiscal Policy in Latin America

Fiscal policy in Latin America has been understudied, in part because of inadequate data. This paper utilizes a new, comprehensive database on fiscal outcomes in 13 major Latin American economies which covers central government, local government, and nonfinancial public enterprises at a reasonably detailed level of aggregation. Armed with this database, we lay out some basic facts about fiscal policy in Latin America. We find stark differences between fiscal outcomes in Latin America and in industrial countries. Fiscal outcomes have been far more volatile in Latin America. In sharp contrast to the industrial economies, fiscal policy in Latin America has also been procyclical, casting doubt on the applicability of the Barro (1979) tax-smoothing hypothesis to Latin America. We discuss alternative explanations of fiscal policy procyclicality. We also consider the relationship of fiscal policy to the exchange-rate regime. Contrary to much conventional wisdom, we find no evidence that fixed exchange rates impose greater discipline on fiscal policy. We also find that fiscal expansions in Latin America have been significantly associated with exchange-rate collapses.

Electoral Systems and Public Spending

We study the effects of electoral institutions on the size and composition of public expenditure in OECD and Latin American countries. We emphasize the distinction between purchases of goods and services, which are easier to target geographically, and transfers, which are easier to target across social groups. We present a theoretical model in which voters anticipating government policymaking under different electoral systems have an incentive to elect representatives more prone to transfer (public good) spending in proportional (majoritarian) systems. The model also predicts higher total primary spending in proportional (majoritarian) systems when the share of transfer spending is high (low). After defining rigorous measures of proportionality to be used in the empirical investigation, we find considerable support for our predictions.

Fiscal expansions and adjustments in OECD countries

Fiscal adjustments Fiscal expansions and adjustments in OECD countries In several countries policy-makers are striving to improve the budget balance, which can be done either by raising taxes or by cutting expenditures. But the two strategies are not equivalent. Drawing on the experience of twenty OECD countries after 1960, this article shows that large fiscal expansions typically occur through increases in expenditure, while large fiscal adjustments rely on tax increases. It also appears that permanent improvements in the fiscal balance crucially differ from fiscal adjustments that lead to a temporary improvement and are reversed in a short time. Permanent improvements are implemented mainly via cuts in two types of expenditure: transfer programmes and compensation of government employees. Temporary improvements are carried out almost exclusively via tax increases. Finally, coalition governments may often try to make substantial fiscal adjustments, but they are much less likely than others to carry out the two types of expenditure cut that make an adjustment successful. These findings convey a clear message: the composition of a fiscal adjustment is of fundamental importance in determining its success. A fiscal adjustment cannot have long-lasting effects unless it tackles two expenditures – government employment and social programmes – often regarded as untouchable by policy-makers and their advisers. — Alberto Alesina and Roberto Perotti

Fragmented fiscal policy

Abstract This paper explores on a panel of 19 OECD countries the role of fragmentation in determining fiscal outcomes over the 1970–95 period. We first define the notion of fragmentation of fiscal policy-making as the degree to which the costs of a dollar of aggregate expenditure are internalized by individual decision-makers. Empirically, this notion has two key logical components: the number of decision-makers and the rules of the game, or the budget process. In turn, the number of decision makers can refer to the number of parties in a coalition, or the number of ministers in the cabinet. We test all these determinants against each other, and against perhaps the oldest explanation of all, ideology. We show that cabinet size and, to a lesser degree, coalition size and ideology, are significant and robust determinants of fiscal outcomes. In particular, transfers are the budget items most affected by these factors.

Budget Deficits and Budget Institutions

By discussing the available theoretical and empirical literature, this paper argues that budget procedures and budget institutions do influence budget outcomes. Budget institutions include both procedural rules and balanced budget laws. We critically assess theoretical contributions in this area and suggest several open and unresolved issue. We also examine the empirical evidence drawn from studies on samples of OECD countries, Latin American countries and the United States. We conclude with a discussion of the normative implications of this literature and with some concrete proposals.

The Effects of Fiscal Policy in Italy: Evidence from a VAR Model

This paper studies the effects of fiscal policy on private GDP, inflation and the long-term interest rate in Italy using a structural vector autoregression model. To this end, a database of quarterly cash data for selected fiscal variables for the period 1982:1-2004:4 is constructed, largely relying on the information contained in the Italian Treasury Quarterly Reports. The main results of the study can be summarized as follows. A shock to government purchases of goods and services has a sizeable and robust effect on economic activity: an exogenous one per cent (in terms of private GDP) shock increases private real GDP by 0.6 per cent after 3 quarters. The response goes to zero after two years, reflecting with a lag the low persistence of the shock. The effects on employment, private consumption and investment are also positive. The response of inflation is positive but small and short-lived. In contrast, public wages, which in many studies are lumped together with purchases, have no significant effect on output, while the effects on employment turn negative after two quarters. Shocks to net revenue have negligible effects on all the variables.

Income distribution and investment

Abstract After being the subject of a heated debate during the sixties and the seventies, the relation between income distribution and growth has received renewed attention in recent years. The new literature has focused on three channels whereby this relation can occur: imperfections in capital markets, voting on fiscal policy, and political instability. In all these approaches, growth in or outside the steady-state is the result of investment in physical or human capital. Therefore, these theories can also be stated and tested in terms of the effects of income distribution on investment. This has the double advantage of reducing the complexity of a necessarily brief survey and of bringing out more clearly the main elements of novelty in this literature. So far, empirical implementations of these theories have in general been restricted to reduced form regressions of growth (or equivalently, investment) on income distribution and other variables. In this survey I take a step further and test the three approaches by explicitly estimating the role of the imperfections in capital markets, of government expenditure and of political instability in mediating the effects of income distribution on investment.