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This paper was written while Mr. Perotti was visiting the Fiscal Affairs Department of the IMF. Mr. Alesina is a professor of Economics and Government at Harvard University. We are very grateful to Vito Tanzi for his hospitality and very useful suggestions. We also thank Francesco Giavazzi, Gian Maria Milesi Ferretti and Kenneth Shepsle for useful comments and conversations. The views expressed in this paper are solely those of the authors and do not represent those of the IMF.
While in both our previous paper and in the present one we mostly focus upon OECD countries, similar issues emerge in developing countries. In fact, even in this group of countries fiscal outcomes vary greatly across countries, and politico-institutional variables are likely to be important explanations.
Even though Friedman was concerned about monetary policy, his argument applies also to fiscal policy.
See Corsetti and Roubini (1994) for a formalization of this argument.
Naturally, one may argue that fiscal discipline in the US would have been even more relaxed without the Budget Act, but this is a difficult point to prove empirically.
For instance in Italy the Treasury, Finance and Budget ministries are involved.
A devil’s advocate may note that Democratic Presidents are sometimes elected and that the republican administrations in the eighties were far from “fiscally conservative” in a traditional sense. Also, the recent (November 1994) mid-term election has produced a configuration of divided government which is opposite from the one predicted by that paper.
Fiorina and Noll (1978) discuss the interaction of bureaucrats interested in increasing the size of the budget and legislators interested in increasing the size of pork barrel programs for their districts.
Both Tanzi (1995) and Alesina, Mare and Perotti (1996) argue that Italy has one of the least transparent procedure, if not the least transparent in the OECD group of countries. These authors agree that lack of transparency has made expenditure control in Italy particularly difficult.
Or of the minister(s) responsible for the preparation of the budget.
Actually, our reading of the Italian case is a bit different. Using their own criterion, we would have classified Italy at the very least in the intermediate group, if not in the hierarchical one. See Alesina, Mare and Perotti (1996) for more discussion.
This result is reminiscent of findings concerning Central Bank independence. Alesina and Summers (1993) show that in OECD countries more independent central banks show lower inflation without an increase in output variability.
Alesina et al (1996) make some progress toward disentangling different effects of different components of the aggregate index, although results on this point are not conclusive for a variety of reasons discussed in that paper.
See Cukierman (1992) for a survey.