Reelection, growth and public debt

Over the past four decades, government debt as a fraction of GDP has been on an upward trajectory in advanced economies, approaching levels not reached since World War II. While normative macroeconomic theories can explain the increase in the level of debt in certain periods as a response to macroeconomic shocks, they cannot explain the broad-based long-run trend in debt accumulation. In contrast, political economy theories can explain the long-run trend as resulting from an aging population, rising political polarization, and rising electoral uncertainty across advanced economies. These theories emphasize the time-inconsistency in government policymaking, and thus the need for fiscal rules that restrict policymakers. Fiscal rules trade off commitment to not overspend and flexibility to react to shocks. This tradeoff guides design features of optimal rules, such as information dependence, enforcement, cross-country coordination, escape clauses, and instrument versus target criteria.

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“…For a starting point in that literature, see Ales, Maziero, and Yared (2014, and the references cited therein). 6…”

Section: Political Economy Forces Behind Rising Government Debtmentioning

confidence: 99%

Rising Government Debt: Causes and Solutions for a Decades-Old Trend

Yared

2019

Journal of Economic Perspectives

150

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“…Adopting a political economy perspective,Raveh and Tsur (2020) confirm that natural resource windfalls increase public debt in democracies. In particular, reelection considerations shorten political time horizons and give rise to political myopia, which turns the effect of resource windfalls positive on debt (which would be a priori ambiguous).©International Monetary Fund.…”

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confidence: 90%