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“ In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.” - PowerPoint PPT Presentation
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“In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.”
-Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget
making process.
Disagreement, Delay, and DeficitsJessica WallackGraduate School of International Relations and Pacific Studies
University of California, San Diego
Why are fiscal (and other) reforms delayed?
Distributional conflict …… but how does distributional conflict turn into delay?
• The accuracy, timeliness, and availability of social and economic data varies widely across countries.
• When publicly available data is less timely and less
accurate, policymakers rely more on heterogeneous private data or personal experience to determine the appropriate policy.
• Greater reliance on private information leads to greater variance of beliefs about the world - more disagreement.
• Disagreement among policymakers about the objective economic situation delays resolution of distributional conflict.
Variance Effect
Opinions about cost of deficit
Inaccurate common information shifts average policymaker’s belief
Mean Effect
Opinions about cost of deficit
The presence of common information reduces variation in beliefs…… however, less accurate common information reduces variation less.
Consequences of Inaccurate Information:Mean Effect vs. Variance Effect
Findings
Countries with accurate economic statistics reduce high deficits faster than countries with less accurate economic statistics.
Executive-centered systemsalso reduce high deficits faster
Measuring Information Quality
• Ideal Measures:• Reputation of data among policymakers in each country• Objective size of error in data
• Feasible Measures: • Variance of price level estimates (Penn World Tables)• Information Index:
– First Principal Component of: » Penn World Tables Variance (0.284)» Ability to Monitor: external data reputation (0.535)» World Bank Rating: coverage, frequency, timeliness
(0.588)
Third Variables and Other Influences: Political and
Governance Culprits• Political Institutions (DPI)
– Executive-centered (0) / Parliamentary (2)– # of veto players – Degree of polarization among veto players– Democracy (Polity IV Index)
• Level of Development (log GDP per capita)
• Transparency (ICRG, 0-6)• Quality of Bureaucracy (ICRG, 0-6)• Debt Burden (Lagged)
Spearman CorrelationsInformation Quality, Political Institutions, Governance
Mon. Capcy
PWT Var.
WB Rating
Info Index Parl
Polarization # Chx
Democ LnGDP
Trans
Monitoring Capacity 1.000
PWT Variance 0.279 1.000
WB Rating 0.307 0.182 1.000
Info Index 0.716 0.378 0.819 1.000
Parliamentary 0.415 0.080 0.184 0.167 1.000
Polarization 0.342 0.334 0.405 0.280 0.286 1.000
# Checks 0.346 0.282 0.490 0.332 0.581 0.708 1.000
Democracy 0.460 0.299 0.347 0.292 0.587 0.603 0.746 1.00
Ln(GDPpc) 0.620 0.395 0.387 0.488 0.497 0.601 0.645 0.649 1.00
Transparency 0.564 0.290 0.271 0.167 0.487 0.518 0.473 0.602 0.650
Bur. Quality 0.657 0.275 0.198 0.277 0.550 0.479 0.572 0.557 0.699 0.757
Accuracy of Economic Statistics
Measuring Delay
• Deficits: A panel of “policy stance” observations.– Various Measures: (1) Primary, (2) Central Government,
(3) Consolidated CG, (4) Public Sector– All measures scaled: + deficit, - surplus
• Error Correction Model: Estimates percent of above – (country) average deficit eliminated annually.– Allows for Asymmetric Adjustment– Controls for economic fluctuations.
Summary StatisticsObservations Mean Standard
DeviationMinimum Maximum
Primary Deficit/GDP 2234 0.689 4.790 -23.800 46.272
Deficit/GDP 3239 3.214 5.224 -22.631 66.231
CCG Savings/GNDI 2750 -2.546 6.220 -38.316 46.307
Public Sector Deficit 804 4.171 4.889 -10.400 27.400
PWT Variance 5240 0.783 0.243 0.200 1.000
Monitor 4800 0.522 0.321 0.000 1.000
WB Rating 4960 0.466 0.231 0.000 0.875
Info Index 2960 2.604 1.000 0 4.932
Parliamentary 6760 0.769 0.835 0.000 2.000
Polarization 6720 0.339 0.569 0.000 2.000
# Checks 6760 2.430 1.388 1.000 7.333
Ln(GDPpc) 5021 8.200 1.047 5.639 10.692
Transparency 4720 3.345 1.389 0.107 6.000
Bur. Qual. 4720 3.206 1.505 0.893 6.000
Democ Index 5031 3.752 4.213 0 10
Democracy (>4, Polity Scale 5031 0.432 0.495 0 1
Basic Error Correction Model with Asymmetric Adjustment
Δdt = α +β1 (dj,t-1 – dj*) +β2 T*(dj,t-1 – dj
*) +α1 Shocksj,t-1 +vjt
β1 : Speed of deficit growth for relatively small deficits (-)
β2 : Incremental effect on adjustment speed for relatively
large deficits (+)β1 + β2 : Speed of deficit reduction for
relatively large deficits (-)
Primary Deficit/GDP Deficit/GDP
Public Sector Deficit/GDP
CCG Savings/GNDI
Distance from
mean: 1 -0.474*** -0.380*** -0.370*** -0.261***
(0.078) (0.046) (0.069) (0.035)Distance from mean* Above
mean: 2 0.209** 0.156** 0.076 0.065(*)
(0.094) (0.075) (0.091) (0.040)
Observations 1871 2732 756 2367
Countries 88 104 46 113 R2 0.18 0.146 0.133 0.078
Control Variables: Growth Changes. Robust standard errors in parentheses *** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.
Significant Asymmetry
Political and Information Effects: Fixed Effects with Interaction
TermsΔdt = α
+β1(dj,t-1 – dj*)
+β2 Tj,t-1*(dj,t-1 – dj*)
+β3 Infoj*(dj,t-1 – dj*)
+β4 Infoj*Tj,t-1*(dj,t-1 – dj*)
+β5k Poljk *(dj,t-1 – dj*)
+β6k Poljk *Tj,t-1*(dj,t-1 – dj*)
+α1Tj,t-1 + α2Tj,t-1*Infoj + α3kTj,t-1*Poljk + α4Shocksj,t-1 +μj+ɛjt
Sum gives “Information Effect” on deficit reduction speed
Sum gives “Political Effect” on deficit reduction speed
Slow Adjustment, Below-Average Information Quality
Deficit Reduction Speed: -0.281Information Rating: 0.6
Medium Adjustment, Below Average Information Quality
Deficit Reduction Speed: - 0.417InformationRating: 0.60
Faster Adjustment, Better Information Quality
Deficit Reduction Speed: -0.596InformationRating: 0.8
Medium Adjustment, Best Information Quality
Deficit Reduction Speed: -0.468InformationRating: 1
Fast Adjustment, Best Information Quality
Deficit Reduction Speed: -1.070Information Rating: 1.00
Findings
•More accurate information associated with faster deficit reduction
• Executive-Centered associated with faster deficit reduction than parliamentary government
• Polarization, checks & balances, governance: no statistically significant effect.
Effect of Information Accuracy on Deficit Reduction Speed: (
Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).
Info. Var./+ Control Var.
Primary Deficit/GDP
CG Deficit / GDP
Public Sector Deficit/GDP
CCG Dissavings/GNDI
PWT Variance -0.031 -0.144 -0.091 -0.241***
+ Parliament -0.124(*) -0.262* -0.010 -0.334***
+ Polarization -0.251*** -0.311* 0.006 -0.364***
+ # Checks -0.194*** -0.230* -0.031 -0.365***
+ Ln(GDPpc) 0.017 -0.068 -0.081 -0.395***
+ Bur. Qual. -0.218** -0.212* 0.039 -0.442***
+ Transparency -0.140* -0.193** 0.003 -0.394***
+ Democracy -0.171** -0.238* -0.073 -0.378***
+ Lagged Debt -0.362** -0.407*** -0.029 -0.294***
Effect of Information Accuracy on Deficit Reduction Speed (Information Index)
Extra percentage points of above-average deficit reduced in a given year from an increase of 1 standard deviation of information index.
Info. Var./+ Control Var
Primary Deficit/GDP
CG Deficit / GDP
Public Sector Deficit/GDP
CCG Dissavings/GNDI
Info Index 0.086 0.013 -0.095(*) -0.038***
+ Parliament 0.091(*) 0.011 -0.098(*) -0.040**
+ Polarization 0.119** 0.009 -0.108(*) -0.021
+ # Checks 0.086 0.002 -0.099(*) -0.018
+ Ln(GDPpc) 0.121(*) 0.006 -0.088 -0.042(*)
+ Bur. Qual. 0.092(*) 0.009 -0.072* -0.091***
+ Transparency 0.091(*) 0.018 -0.064(*) -0.056**
+ Democracy 0.085 0.008 -0.111* -0.032(*)
+ Lagged Debt -0.003 0.050 0.006 -0.101(*)
Primary Deficit vs. Public Deficit(Low Information Quality)
Primary Deficit vs. Public Deficit(Higher Information Quality)
Effect of Political Institutions on Reduction Speed
Pol Var/Info. Var Prim Deficit/GDP
CG Deficit/ GDP
PS Deficit/GDP
CCG Dissavings/GNDI
Parliamentary
PWT Var 0.119*** 0.003 0.112*** 0.066*
Info Index 0.122*** 0.025 0.101 0.048
Polarization
PWT Var 0.071** 0.035 0.028 0.001
Info Index 0.434 0.039 0.087 -0.142
Checks
PWT Var 0.033 -0.016(*) 0.063** 0.001
Info Index 0.004 0.032 0.048 -0.041
Democracy
PWT Var 0.006 -0.037*** 0.022 -0.009
Info Index 0.008 0.008 0.02 -0.007
Effect of Governance Quality on Reduction Speed
Governance Var./Info. Var
Prim Deficit/GDP
CG Deficit/ GDP
PS Deficit/GDP
CCG Dissavings/GNDI
Level of Development
PWT Var 0.002 -0.065 0.003 0.048*
Info Index -0.149(*) 0.017 -0.028 0.011
Bureaucratic Quality
PWT Var 0.064* -0.016 0.021 0.038(*)
Info Index 0.088 0.121(*) -0.105 0.118***
Transparency
PWT Var -0.003 -0.023 0.031*** 0.013
Info Index -0.061 0.046(*) -0.167 0.064
Information and Economic Outcomes
• Demonstrated connection between information quality and speed of policy change
• Implication: better data improves policymaking as well as policy.– credible economic and social data speeds reform – important to provide policymakers with
information they perceive as relevant and useful.
New Avenues for Research
• Why is more accurate economic information associated with faster reform?
• Testing “variance effect” more directly: Interaction with country institutions,
specific reform settingsInteraction with underlying disagreement
• Other questions to ask about data: Bias of data providersTimeliness
• What factors lead to investment in better publicly available information?
“In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.”
-Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget making process.
Primary Deficit/GDP Deficit/GDP
Public Sector Deficit/GDP
CCG Savings/GNDI
Distance from
mean: 1 -0.411*** -0.130(*) -0.103 -0.084*
(0.089) (0.086) (0.096) (0.051)Distance from mean* Above
mean: 2 0.135 -0.176 -0.101 0.059**
(0.125) (0.135) (0.088) (0.026)
Observations 739 1000 221 802
Countries 43 58 23 57 R2 0.245 0.16 0.072 0.074
Control Variables: Growth Changes. Robust standard errors in parentheses *** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.
Significant AsymmetryBenchmark: Sustainable Deficit
Effect of Information Accuracy on Deficit Reduction Speed: (
Benchmark: “Sustainable” Deficit
Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).
Info. Var./+ Control Var.
Primary Deficit/GDP
CG Deficit / GDP
Public Sector Deficit/GDP
CCG Dissavings/GNDI
PWT Variance -0.095 -0.031*** -0.035 -0.055
+ Parliament -0.083 -0.056*** 0.020 -0.050
+ Polarization -0.186* -0.076*** -0.017 -0.067
+ # Checks -0.116(*) -0.063*** 0.005 -0.045
+ Ln(GDPpc) -0.225* -0.070*** 0.032 -0.163*
+ Bur. Qual. -0.108 -0.020(*) -0.001 -0.067
+ Transparency -0.045 -0.040** 0.005 -0.056
+ Lagged Debt -0.101 -0.026* -0.020 -0.092
Deficit Reduction Speeds: Individual Country Estimates
Deficit Measure
# Countries Mean
Std. Deviation Minimum Maximum
Primary Deficit
88 -0.274 0.400 -2.186 0.929
CG Deficit
104 -0.358 0.313 -1.206 0.536
CCG Dissaving
113 -0.225 0.291 -1.268 0.574
Public Sector Deficit
46 -0.318 0.264 -1.068 0.141
Adjustment Speed and Information Quality
(OLS on Country Estimates)
Robust standard errors in parentheses.
Speed of PS Deficit Reduction
Speed of CCG Dissavings Reduction
PWT Variance -1.875 -1.463***
(1.693) (0.483)
PWT Var (Sq) 1.340 1.080***
(1.112) (0.375)
Constant 0.261 0.194
(0.616) (0.137)
Max Adjustment Spd
0.700 0.677
# Observations 43 101
R-sq 0.015 0.062
Adjustment Speed and Information Quality
(OLS on Country Estimates)
Speed of PS Deficit Reduction
Speed of CCG Dissavings Reduction
Information Index
-0.122 -0.044*
(0.094) (0.255)
Constant -0.266** -0.254***
(0.106) (0.039)
# Observations 20 56
R-sq 0.116 0.026
Robust standard errors in parentheses.
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