Why are Stabilizations Delayed?

33 Pages Posted: 25 Oct 2000

See all articles by Alberto F. Alesina

Alberto F. Alesina

Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: August 1989

Abstract

When a stabilization has significant distributional implications (as in the case of tax increases to eliminate a large budget deficit) different socio-economic groups will attempt to shift the burden of stabilization onto other groups. The process leading to a stabilization becomes a "war of attrition", with each group finding it rational to attempt to wait the others out. Stabilization occurs only when one group concedes and is forced to bear a disproportionate share of the burden of fiscal adjustment. We solve for the expected time of stabilization in a model of "rational" delay based on a war of attrition and present comparative statics results relating the expected time of stabilization to several political and economic variables. We also motivate this approach and its results by comparison to historical episodes.

Suggested Citation

Alesina, Alberto F. and Drazen, Allan, Why are Stabilizations Delayed? (August 1989). NBER Working Paper No. w3053. Available at SSRN: https://ssrn.com/abstract=246871

Alberto F. Alesina (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-8388 (Phone)
617-495-7730 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Allan Drazen

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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