Optimal Fiscal Policy in an Economy Facing Sociopolitical Instability

Chetan Ghate, Quan Vu Le and Paul Zak ()

Review of Development Economics, 2003, vol. 7, issue 4, 583-598

Abstract: 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.

Date: 2003
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https://doi.org/10.1111/1467-9361.00210

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Working Paper: Optimal Fiscal Policy in an Economy Facing Socio-Political Instability (2002)
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