Fiscal policy and electoral competition

The first part of this research is a two-pronged project on the political and institutional determinants of fiscal policy and its components both at the theoretical and empirical level. The second part, presented in chapter three, is an empirical investigation of the macroeconomic effects of fiscal policy in Chile.;The first chapter develops a political economy model of fiscal policy. It investigates the relationship between electoral competition and fiscal policy in a discrete-time, discounted optimization game between an incumbent government and its opposition.;The second chapter investigates the relationship between electoral competition and fiscal policy in 18 OECD countries for the period 1960-1989. Why did certain OECD countries, but not others, accumulate large public deficits? Why did these fiscal imbalances appear in the last twenty years rather than before? To address these questions, I first define electoral competition as the perceived competition for the incumbent government in an electoral year and measure it by a new index employing actual electoral data; then, I estimate a non-linear model in which electoral competition and fiscal policy are jointly determined.;The third chapter, co-authored with Dimitrios Thomakos, investigates empirically the significance of fiscal policy on the Chilean post-stabilization path using monthly data that span the period 09-86 to 12-95. A two-pronged econometric methodology is followed: first, a Dynamic Structural Model (DSM) is built and estimated by the method of Langrange Multipliers (LM), Dhrymes (1994). An empirical implementation of this method has not yet appeared in the literature. This procedure offers a straightforward way for performing specification tests directly on the structure of the model. With the DSM effects of fiscal and monetary policy are identified on the Chilean economy in general, and quantitative and qualitative answers are provided on the relative importance of the two on prices, real exchange rates and aggregate activity in particular. Then, a single-equation method, estimated by Fully Modified Least Squares, Phillips (1995), analyzes the interplay between fiscal and monetary policies in inflation stabilization: this method is formulated and interpreted as a long-run relationship and it identifies the optimal mix for these two policies.;The major finding is that fiscal policy seems to have played an equal or more significant role for stabilization than monetary policy, while it could also account for the real appreciation in the sample period. Moreover, dynamic response analysis indicates that the effects of monetary policy are not as robust, as those of fiscal policy. It is conjectured that a credible fiscal policy affects agents' expectations of activity and inflation faster than monetary policy. Moreover, while fiscal policy appears as a necessary condition for successful price stabilization, the same is not true for monetary policy. (Abstract shortened by UMI.).