Is Public Spending Determined by Voter Choice of Fiscal Capacity?

Leonard Dudley and Claude Montmarquette

The Review of Economics and Statistics, 1992, vol. 74, issue 3, 522-29

Abstract: Previous models of public spending fail to explain why high inflation rates are distributed non-randomly across countries. In the switching-regime specification proposed here, governments tend to resort to inflationary debt monetarization when the spending level chosen by voters exceeds actual revenue capacity. The voter-choice and fiscal-capacity models of earlier studies are special cases of this framework. Using cross country data for 1970, 1975 and 1980, the authors find that the voter-choice specification applies to most industrialized countries, whereas fiscal capacity appears to constrain government spending in most developing countries. High inflation appears to result from shocks that alter a country's fiscal capacity relative to voters' expectations. Copyright 1992 by MIT Press.

Date: 1992
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Working Paper: Is Public Spending Determined by Voter Choice Or Fiscal Capacity? (1990)
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