Government Spending and Re-election

Does additional government spending improve the electoral chances of incumbent political parties? This paper provides the first quasi-experimental evidence on this question. Our research design exploits discontinuities in federal funding to local governments in Brazil around several population cutoffs over the period 1982-1985. We find that extra fiscal transfers resulted in a 20% increase in local government spending per capita, and an increase of about 10 percentage points in the re-election probability of local incumbent parties. We also find positive effects of the government spending on education outcomes and earnings, which we interpret as indirect evidence of public service improvements. Together, our results provide evidence that electoral rewards encourage incumbents to spend part of additional revenues on public services valued by voters, a finding in line with agency models of electoral accountability.

The Labor Market Effects of Technology Shocks

We analyze the labor market effects of neutral and investment-specific technology shocks along the intensive margin (hours worked) and the extensive margin (unemployment). We characterize the dynamic response of unemployment in terms of the job separation and the job finding rate. Labor market adjustments occur along the extensive margin in response to neutral shocks, along the intensive margin in response to investment specific shocks. The job separation rate accounts for a major portion of the impact response of unemployment. Neutral shocks prompt a contemporaneous increase in unemployment because of a sharp rise in the separation rate. This is prolonged by a persistent fall in the job finding rate. Investment specific shocks rise employment and hours worked. Neutral shocks explain a substantial portion of the volatility of unemployment and output; investment specific shocks mainly explain hours worked volatility. This suggests that neutral progress is consistent with Schumpeterian creative destruction, while investment-specific progress operates as in a neoclassical growth model.

En busca del ciudadano Kane : los dueños de medios de comunicación y su utilización política

Aquesta recerca té com a objecte d'estudi la utilització dels mitjans de comunicació per a finalitats polítiques i intenta analitzar la relació que els polítics professionals mantenen amb els mitjans i com aquests poden ser importants dins d'un procés polític-electoral i per a la formació de l'opinió pública. El nostre objectiu general és, entre d’altres, analitzar l'estructura d’aquests mitjans i grups polítics i descriure com estan situats, utilitzant com a exemple l'estat del Rio Grande do Norte (RN), al Nord-est de Brasil. Partint de les preguntes, ¿a qui pertanyen els mitjans de comunicació i qui té el poder d'informar en l'aquest Estat? anem construïm el marc teòric, analitzant el monopoli i oligopoli en la comunicació a Brasil, especialment a la radiodifusió, en la qual hi ha una gran concentració de concessions públiques en propietat dels polítics professionals amb mandats electius i/o de grups partidaris, què pot ser anomenat de ‘coronelismo electrònic’

Equilibrium asset prices and savings of heterogeneous agents in the presence of incomplete markets and portfolio constraints

We study the quantitative properties of a dynamic general equilibrium model in which agents face both idiosyncratic and aggregate income risk, state-dependent borrowing constraints that bind in some but not all periods and markets are incomplete. Optimal individual consumption-savings plans and equilibrium asset prices are computed under various assumptions about income uncertainty. Then we investigate whether our general equilibrium model with incomplete markets replicates two empirical observations: the high correlation between individual consumption and individual income, and the equity premium puzzle. We find that, when the driving processes are calibrated according to the data from wage income in different sectors of the US economy, the results move in the direction of explaining these observations, but the model falls short of explaining the observed correlations quantitatively. If the incomes of agents are assumed independent of each other, the observations can be explained quantitatively.

Are rules-based government programs shielded from special-interest politics? Evidence from revenue-sharing transfers in Brazil

Manipulation of government finances for the benefit of narrowly defined groups is usuallythought to be limited to the part of the budget over which politicians exercise discretion inthe short run, such as earmarks. Analyzing a revenue-sharing program between the centraland local governments in Brazil that uses an allocation formula based on local population estimates,I document two main results: first, that the population estimates entering the formulawere manipulated and second, that this manipulation was political in nature. Consistent withswing-voter targeting by the right-wing central government, I find that municipalities withroughly equal right-wing and non-right-wing vote shares benefited relative to opposition orconservative core support municipalities. These findings suggest that the exclusive focus ondiscretionary transfers in the extant empirical literature on special-interest politics may understatethe true scope of tactical redistribution that is going on under programmatic disguise.

The HP-filter in cross-country comparisons

Many empirical studies of business cycles have followed the practise ofapplying the Hodrick-Prescott filter for cross-country comparisons. Thestandard procedure is to set the weight \lambda, which determines the'smoothness' of the trend equal to 1600. We show that if this value isused for against common wisdom about business cycles. As an example, weshow that the long recession occurred inSpain between 1975 and 1985 goesunnotoced by the HP filter. We propose a method for adjusting \lambda byreinterpreting the HP-filter as the solution to a constrained minimizationproblem. We argue that the common practice of fixing \lambda across countriesamounts to chankging the constraints on trend variability across countries.Our proposed method is easy to apply, retains all the virtues of thestandard HP-filter and when applied to Spanish data the results are inthe line with economic historian's view. Applying the method to a numberof OECD countries we find that, with the exception of Spain, Italy andJapan, the standard choice of \lambda=1600 is sensible.

Wage rigidity and job creation

Recent research in macroeconomics emphasizes the role of wage rigidity in accounting for the volatility of unemployment fluctuations. We use worker-level datafrom the CPS to measure the sensitivity of wages of newly hired workers to changesin aggregate labor market conditions. The wage of new hires, unlike the aggregatewage, is volatile and responds almost one-to-one to changes in labor productivity.We conclude that there is little evidence for wage stickiness in the data. We alsoshow, however, that a little wage rigidity goes a long way in amplifying the responseof job creation to productivity shocks.

The dynamics of US inflation: Can monetary policy explain the changes?

We investigate the relationship between monetary policy and inflation dynamics in theUS using a medium scale structural model. The specification is estimated with Bayesiantechniques and fits the data reasonably well. Policy shocks account for a part of the declinein inflation volatility; they have been less effective in triggering inflation responses overtime and qualitatively account for the rise and fall in the level of inflation. A number ofstructural parameter variations contribute to these patterns.

Social capital, government expenditures, and growth

Countries with greater social capital have higher economic growth. We show that socialcapital is also highly positively correlated across countries with government expenditureon education. We develop an infinite-horizon model of public spending and endogenousstochastic growth that explains both facts through frictions in political agency whenvoters have imperfect information. In our model, the government provides servicesthat yield immediate utility, and investment that raises future productivity. Voters aremore likely to observe public services, so politicians have electoral incentives to underprovidepublic investment. Social capital increases voters' awareness of all governmentactivity. As a consequence, both politicians' incentives and their selection improve.In the dynamic equilibrium, both the amount and the efficiency of public investmentincrease, permanently raising the growth rate.

The political cost of reforms

This paper formalizes in a fully-rational model the popular idea that politiciansperceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters.To do so, it proposes a model of elections where political ability is ex-ante unknownand investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politiciansmake too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannotbe fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary tothe conventional wisdom, uncertainty makes reforms more politically viable and may,under some conditions, increase social welfare. The model is then used to study howpolitical rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistentwith a number of empirical regularities on the determinants of reforms and reelection.They are also consistent with a new stylized fact documented in this paper: economicuncertainty is associated to more reforms in a panel of 20 OECD countries.

Two-sided learning in New Keynesian models: Dynamics, (lack of) convergence and the value of information

This paper investigates the role of learning by private agents and the central bank(two-sided learning) in a New Keynesian framework in which both sides of the economyhave asymmetric and imperfect knowledge about the true data generating process. Weassume that all agents employ the data that they observe (which may be distinct fordifferent sets of agents) to form beliefs about unknown aspects of the true model ofthe economy, use their beliefs to decide on actions, and revise these beliefs througha statistical learning algorithm as new information becomes available. We study theshort-run dynamics of our model and derive its policy recommendations, particularlywith respect to central bank communications. We demonstrate that two-sided learningcan generate substantial increases in volatility and persistence, and alter the behaviorof the variables in the model in a significant way. Our simulations do not convergeto a symmetric rational expectations equilibrium and we highlight one source thatinvalidates the convergence results of Marcet and Sargent (1989). Finally, we identifya novel aspect of central bank communication in models of learning: communicationcan be harmful if the central bank's model is substantially mis-specified.

Heterogeneous information and trade policy

Protectionism enjoys surprising popular support, in spite of deadweight losses. At thesame time, trade barriers appear to decline with public information about protection.This paper develops an electoral model with heterogeneously informed voters whichexplains both facts and predicts the pattern of trade policy across industries. In themodel, each agent endogenously acquires more information about his sector of employment. As a result, voters support protectionism, because they learn more about thetrade barriers that help them as producers than those that hurt them as consumers.In equilibrium, asymmetric information induces a universal protectionist bias. Thestructure of protection is Pareto inefficient, in contrast to existing models. The modelpredicts a Dracula effect: trade policy for a sector is less protectionist when there ismore public information about it. Using a measure of newspaper coverage across industries, I find that cross-sector evidence from the United States bears out my theoreticalpredictions.

The network origins of aggregate fluctuations

This paper argues that in the presence of intersectoral input-output linkages, microeconomicidiosyncratic shocks may lead to aggregate fluctuations. In particular, itshows that, as the economy becomes more disaggregated, the rate at which aggregatevolatility decays is determined by the structure of the network capturing such linkages.Our main results provide a characterization of this relationship in terms of the importanceof different sectors as suppliers to their immediate customers as well as theirrole as indirect suppliers to chains of downstream sectors. Such higher-order interconnectionscapture the possibility of "cascade effects" whereby productivity shocks to asector propagate not only to its immediate downstream customers, but also indirectlyto the rest of the economy. Our results highlight that sizable aggregate volatility isobtained from sectoral idiosyncratic shocks only if there exists significant asymmetryin the roles that sectors play as suppliers to others, and that the "sparseness" of theinput-output matrix is unrelated to the nature of aggregate fluctuations.

Turnout, political preferences and information: Experimental evidence from Perú

Electoral institutions that encourage citizens to vote are widely used around the world. Yet littleis known about the effects of such institutions on voter participation and the composition of the electorate.In this paper, I combine a field experiment with a change in Peruvian voting laws to identify theeffect of monetary (dis-)incentives on voting. Using the random variation in the fine for abstention andan objective measure of turnout at the individual level, I estimate the elasticity of voting with respectto cost to be -0.21. Consistent with the theoretical model presented, the reduction in turnout inducedby the reduction in the fine is driven by voters who (i) are in the center of the political spectrum, (ii)are less interested in politics, and (iii) hold less political information. However, voters who respondto changes in the cost of abstention do not have different preferences for policies than those who voteregardless of the cost. Further, involvement in politics, as measured by the decision to acquire politicalinformation, seems to be independent of the level of the fine. Additional results indicate that thereduction in the fine does not affect the incidence of vote buying, but increases the price paid for avote.

On the impact of leverage constraints on asset prices and trading volume

Researchers have used stylized facts on asset prices and trading volumein stock markets (in particular, the mean reversion of asset returnsand the correlations between trading volume, price changes and pricelevels) to support theories where agents are not rational expected utilitymaximizers. This paper shows that this empirical evidence is in factconsistent with a standard infite horizon perfect information expectedutility economy where some agents face leverage constraints similar tothose found in todays financial markets. In addition, and in sharpcontrast to the theories above, we explain some qualitative differencesthat are observed in the price-volume relation on stock and on futuresmarkets. We consider a continuous-time economy where agents maximize theintegral of their discounted utility from consumption under both budgetand leverage con-straints. Building on the work by Vila and Zariphopoulou(1997), we find a closed form solution, up to a negative constant, for theequilibrium prices and demands in the region of the state space where theconstraint is non-binding. We show that, at the equilibrium, stock holdingsvolatility as well as its ratio to stock price volatility are increasingfunctions of the stock price and interpret this finding in terms of theprice-volume relation.