Politico-economic models and cycles

Studies are surveyed analyzing the mutual interaction of economy and polity in an empirically testable way. A wide variety of assumptions are made concerning the behaviour of economic and political decision-makers–in particular voters and government, as well as the economic and political sectors. Representative models are discussed considering steady state equilibria and political business cycles, and empirical results are presented for the U.S., the U.K. and Germany. Finally, the potential and prospects of politico–economic modelling are discussed.     

Politico-economic inequality and the comovement of government purchases

This paper explores the implications of economic and political inequality for the comovement of government purchases with macroeconomic fluctuations. We set up and compute a heterogeneous-agent neoclassical growth model, where households value government purchases which are financed by income taxes. A key feature of the model is a wealth bias in the political aggregation process. When calibrated to U.S. wealth inequality and exposed to aggregate productivity shocks, such a model is able to generate weaker positive comovement of government purchases than models with no political wealth bias. The wealth bias that matches the cross-sectional campaign contribution distribution by income is consistent with the mild positive comovement of government purchases in the aggregate data. We thus provide an empirically relevant example where economic and political heterogeneity matter for aggregate dynamics.     

Xenophobia and the Size of the Public Sector in France: A Politico-economic Analysis

Anti-immigrant feeling (xenophobia) among voters was a key factor in the second-place victory of Jean Le Pen's National Front Party in the 2002 French national election. Here, we study the effect of anti-immigrant sentiment on the equilibrium position of political parties on the economic issue, which we take to be the size of the public sector. We model political competition among three parties (Left, Right, and Extreme Right) on a two-dimensional policy space (public sector size, immigration issue) using the PUNE model. We calibrate the model to French data for the election years 1988 and 2002, and show that politics have changed significantly over this period, from being centered primarily on economic issues, to non-economic issues such as immigration and security/law-and-order. We estimate that in 2002, the effect of voter xenophobia was to reduce the voters' choice of public-sector size between 11% and 28% of one standard deviation of the population's distribution of public-sector size ideal points, from what it would have been, absent xenophobia.     

Banking deregulation and allocative efficiency in Pakistan

This article examines the impact of deregulation policies on allocative efficiency of banks in Pakistan. It investigates whether deregulation has impacted the pattern of allocative efficiency of banks and explores which bank ownership segment has been more responsive. It uses data from 1991 to 2005 and explicitly models allocative inefficiency by using the translog shadow cost-share system. Empirical results show that overregulation and imperfect market structure hampers the ability of banks to make competitive decisions. We find evidence of allocative inefficiency leading to over-utilization of labour and deposits vis-à-vis operating cost. Empirical results for time-varying allocative efficiency show declining levels of allocative inefficiency for state-owned and private banks in post-reform period. Deregulation policies induce state-owned banks to decrease over-utilization of labour relative to deposits and operating cost while private banks succeed in using operating cost closer to optimal levels. Hence, policymakers have latitude to introduce more reforms without jeopardizing allocative efficiency.     

Deposit rate ceiling deregulation and mortgage innovation

In many countries household financing of housing purchases has assumed a special role and as a consequence constraints have been imposed on financial institutions and on financing contracts. In addition, of course, direct subsidization of housing is pervasive. In a macroeconomic environment with inflation and variable interest rates, the constraints sometimes lead to problems for lenders and borrowers. In the U.S. these problems have resulted in pressures to change the nature of the lending institution, the financial intermediation structure and/or the mortgage contract. This paper considers the use of new, innovative, mortgage contract designs as a method of portfolio diversification when thrift institutions face deposit-rate ceiling deregulation. Since thrift institutions have been more constrained than commercial banks, changing the constraints on the former may lead to behavioral changes by the latter. Alternative scenarios about commercial bank deposit rate behavior are examined. It is found that contracts exist that minimize savings reallocation toward commercial banks, thus protecting, in a sense, the specialized mortgage lending institutions (thrift institutions). These contracts also have nice properties for mortgagors during inflationary periods. However, it is also found that certain new mortgage contracts may protect thrift institutions without maintaining the historical flow of capital into the housing sector.     

Labour market deregulation, 'flexibility' and innovation

Labour ‘flexibility’ is often portrayed as importantto competitive success. Using evidence from an original surveyof UK firms, this paper investigates the relationships betweenfirms' use of, on the one hand, various flexible work practices,human resource management techniques, and industrial relationssystems and, on the other hand, the innovative activities ofthose firms. Our results suggest that the sort of ‘lowroad’ labour flexibility practices encouraged by labourmarket deregulation—short-term and temporary contracts,a lack of employer commitment to job security, low levels oftraining, and so on—are negatively correlated with innovation.     

The short-run effects of airline deregulation

A test of the effect of the deregulation of the U.S. domestic airline industry finds no statistically significant effects on industry costs. Scale economies are estimated and found to be substantial.     

The impact of restructuring and deregulation on gas rates

This article evaluates the impact of consumer choice programs, price caps, and sliding scale plans on consumer prices of gas using a custom survey of public service commissions and data from the Department of Energy. A seemingly unrelated regressions model estimates residential, commercial and industrial prices jointly, controlling for potentially endogenous demand. Consumer choice programs are estimated to lower residential and commercial prices significantly, by bringing competition to markets with smaller consumers. Prices fall even before deregulation as utilities build consumer loyalty and fight competition. Sliding scale plans are estimated to lower prices of small consumers while raising industrial prices. Price caps lead to overall higher prices, with unclear ranking across consumer classes.      

Monetary deregulation and inverting the inverted fisher effect

We find evidence that deregulation allowing interest payments on checkable deposits decreased (increased) the sensitivity of the real (nominal) rate of interest to expected inflation. Our results provide further confirmation of the Inverted Fisher Effect.     

Product market deregulation and the US employment miracle

We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is combining a job matching model with monopolistic competition in the goods market and individual bargaining. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980s and 1990s could be directly attributed to product market deregulation. Under our baseline calibration, our results suggest that a decrease of less than two-tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount.     

Effects of deregulation on failing thrift institutions

The purpose of this paper is to test the hypothesis that much of the decline in the net worth of the failing saving and loan institutions was a result of deregulation. Variables are developed to represent major actions to deregulate S&Ls activities and to measure the impacts on institutions' net worth. A mixed cross-section&z.urule;time series analysis is developed to estimate the effects of financial deregulation on failing thrifts' net worth. The data are 1984-89 balance sheet adn income statement data for thrift institutions, prior to the enactment of the 1989 legislation to solve the crisis. The reuslts of the analysis indicate that deregulation of asset and deposit activities was not the cause of the financial distress of failing US thrift institutions. The primary cause appears to be the increase in the federal deposit insurance limit to $100 000 and how attractive this legislative action made brokering deposits that became insured up to $100 000.     

The economics of deregulation of local exchange telecommunications

This paper has two objectives. The first is to reappraise the potential competitiveness of local exchange telecommunications markets, in light of recent arguments in favor of deregulation. The second objective is to discuss regulatory reform strategies. We conclude that local telecommunications markets retain the essential characteristics of a natural monopoly, but that many of the regulatory reforms are nevertheless desirable.     

Capital markets' assessment of airline restructuring following deregulation

The Airline Deregulation Act of 1978 propelled the industry into a constant state of change, even turmoil, that prevails 14 years later. The purpose of this paper is to examine the capital markets' reactions to the dramatic restructuring of the airline industry. The results of an event study of 24 merger announcements indicates that stockholders of target firms experience positive abnormal returns of 14.5% over a three-day period around the merger announcement date. Bidding firms experience a 3.7% increase over the same time window. Clearly, the capital markets viewed this restructuring of the industry as positive.     

Phasing of deregulation: Normative versus positive objectives

Deregulation is traditionally endorsed by economists but meets either little reception by politicians or is substantially weakened within the political process. Many papers discuss this aspect, primarily from a rent-seeking aspect. This paper emphasizes the dynamics of deregulation when consumers have sunk costs on the basis of a past regulatory regime. The paper proves first that deregulation should be radical rather than transitory within a conventional, normative framework, even if the consumers act naively and have to bear substantial adjustment costs. As a contrast, a positive model of a vote maximizing politician is introduced that explains why and when actual deregulation proceeds gradually. However, a politician should deregulate at an excessively radical rate at the beginning, if voters have a short memory and/or if demand adjusts sufficiently fast.     

Product cycles,innovation cycles,and regional economic change

The effects of technological change below the level of national and sectoral aggregations are frequently overlooked. This paper reviews the regional economic changes that result from technological change at both the firm level and in the individual plant. The related concepts of product cycles and innovation cycles provide a perspective for assessing regional and local effects. Government policies related to innovation are examined in the light of regional economic implications.     

Growth,deregulation and rent seeking in post-war British economy

Post-war political consensus about the need for government action to rectify market failure began to unravel in the 1970s, and even the need for prudential control of banking and finance began to be challenged by the start of the 1980s. Regulatory oversight was relaxed in the belief that emerging techniques in financial engineering would render irrelevant fears of sharp periodic downturns that have historically been the consequence of lightly regulated finance. The outcome of this new policy, embracing the idea of unregulated markets to deliver greater prosperity, is disappointing. We find that the average growth rate of UK GDP and output per person employed for three decades from the start of liberalization was no greater than that in the previous three post-war decades. Cyclical fluctuations were deeper. A remarkable feature of the second period is the sharp rise in income inequality in favour of the very top earners. An illusion of greater prosperity for a wider segment may have been created in the second period due to asset price bubbles and housing inflation.     

Quantity,quality and the welfare effects of US airline deregulation

In this paper we employ a method for estimationg quality-adjusted demand to calculate measures of the change in consumer suruplus due to US airline deregulation. The quality-adjusted estimates of the price elasticity of demand indicate that consumers are from 25% to 50% more sensitive to changes in air fares than unadjusted estimates would suggest. Changes in unadjusted consumer surplus overstate the net welfare gains from deregulation by roughly a factor of two, strongly suggesting that adjustments for quallity of service are essential to welfare analysis of regulatory changes in this industry     

Housing cycles and efficiency

This paper has four objectives. First, a small model of the UK housing market is constructed, including equations for house prices, housing starts, construction costs and interest rates. The model is used in an analysis of housing market cycles, employing techniques developed for the analysis of general business cycles. Second, the model is used to consider housing market efficiency. Third, the model is extended to examine the relationship between house prices and property transactions. Finally, the role of monetary policy in the generation of housing cycles and stability is discussed.     

Business cycles and schooling

It has been suggested that recessions are the appropriate time for undertaking activities that promote long-term performance (such as re-organization, human capital investments, R&D). In this paper, we study the cyclical patterns of one such activity, namely schooling. In particular, we examine the cyclicality in the school enrollment rates of various age groups in the US. The overall pattern is countercyclical. In addition, schooling seems to respond negatively to the expected real interest rate. Overall, the results seem to support the view that variation in opportunity costs associated with business cycles plays a major role in schooling decisions.