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Optimal Fiscal Policy in an Economy Facing Sociopolitical Instability
Author(s) -
Ghate Chetan,
Le Quan Vu,
Zak Paul J.
Publication year - 2003
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00210
Subject(s) - economics , government (linguistics) , poverty , fiscal policy , endogenous growth theory , growth model , poverty trap , monotone polygon , general equilibrium theory , simultaneous equations model , macroeconomics , public economics , econometrics , economic growth , human capital , mathematics , philosophy , linguistics , geometry
The paper presents a model of optimal government policy when policy choices may exacerbate sociopolitical instability (SPI). The authors show that optimal policy that takes into account SPI transforms a standard concave growth model into a model with both a poverty trap and endogenous growth. The resulting equilibrium dynamics inherit the properties of government policies and need not be monotone. Indeed, for a broad set of conditions, government policy is unable to eliminate the poverty trap; when these conditions do not hold, “most” countries eventually reach a balanced growth path. The predictions of the model are tested by developing three new measures of SPI for a panel of 58 countries. Estimating optimal policies and the growth equation derived from the model reveals strong support for the theory.