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Budget Deficits and Income Fluctuation in a Political Economy

  • Toshihiro IhoriEmail author
  • Keigo Kameda
Chapter
Part of the SpringerBriefs in Economics book series (BRIEFSECONOMICS)

Abstract

Chapter  1 showed that the “functioning-of-government” index, as published in the Economist Intelligence Unit’s Democracy Index, has a significant effect on fiscal cyclicality. This index represents the strength of governments to execute their policies independently. In this chapter, we build a theoretical model to treat this independence in order to consider how a government may determine the level of deficit and to investigate the applicability of this model empirically. If the government can control political behavior, normally, the budget deficit should increase during recession as a first-best case. However, interestingly, recession does not necessarily prompt an increase in the optimal budget deficit in the second-best case in a political economy. The response of the optimal budget deficit to income fluctuations mainly depends on the efficiency of political effort, which may correspond to the functioning of governments in a democratic society. We test the predictions of a procyclical fiscal policy and find it applicable to democratic countries with semi-efficient governments.

Keywords

Budget deficits Fiscal privilege Political effort Income fluctuation 

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Copyright information

© Development Bank of Japan 2018

Authors and Affiliations

  1. 1.National Graduate Institute for Policy StudiesMinato-kuJapan
  2. 2.Kwansei Gakuin UniversitySandaJapan
  3. 3.Research Institute of Capital FormationDevelopment Bank of JapanChiyoda-kuJapan

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