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Public Choice

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07-07-2018

Public debt stabilization: the relevance of policymakers’ time horizons

Authors: Giovanni Di Bartolomeo, Marco Di Pietro, Enrico Saltari, Willi Semmler

Published in: Public Choice | Issue 3-4/2018

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Abstract

Policymakers are stuck in time. Political short-termism, policy myopia, policy short-sightedness, and similar words have been coined to emphasize the present-centric policy thinking. Politics tends to produce short time horizons, and as a result, policymakers often fail to use present opportunities to mitigate future harms. Focusing on fiscal and monetary strategic interactions, given different separate decision makers, our paper aims to explore the effects of policymakers’ time horizons on debt stabilization. To formalize our ideas, we use the novel concept of Nonlinear-model-predictive-control Feedback Nash Equilibrium (NFNE) and find that present-centric policy thinking and decision horizons matters under several dimensions.

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See, e.g., van Aarle et al. (1995, 1997), Tabellini and La Via (1989), Engwerda et al. (2002, 2013, 2015, 2016), Getzner and Neck (2001), Van den Broek (2002), Di Bartolomeo and Di Gioacchino (2008), Blueschke and Neck (2011, 2014), Anevlavis et al. (2018), and van Aarle et al. (2018).

Except in the case in which he agrees with the other members of the group (with a quid pro quo).

See also Buchanan and Wagner (1977: Chapter 9) and Buchanan and Lee (1982).

See, e.g., Alesina and Tabellini (1990), Buchanan and Congleton (1994), Lockwood et al. (1996), Glaeser (1997), Devereux and Wen (1998), Persson and Tabellini (1999), Sieg (2001), Lopez (2003), Johnson and Crain (2004), Dalle Nogare and Ricciuti (2011), and Smart and Sturm (2013).

Whether a democratic or an authoritarian regime is better for economic growth has been largely discussed and researched. A partial survey is provided by Dixit (2010). See also Wintrobe (2001) or Acemoglu and Robinson (2006).

See, e.g., Persson and Tabellini (1999) and Eslava (2011), for partial surveys.

The model collapses to Tabellini (1986) for α = 0.

This formalization represents the NFNE. A full discussion on the idea of NFNE and a comparison with other equilibrium concepts can be found in Di Bartolomeo et al. (2017). See also van den Broek (2002), for a similar concept based on repetitions of infinite horizon problems. Under some circumstances (in particular, long horizons), the NFNE may approximate the open-loop Nash equilibrium.

Note that we focus on changes in rulers (leadership turnover) and not on changes in the rulers' ideology (ideological turnover), which has been studied elsewhere (for instance, Drazen 2000, 2001).

See, for instance, Sims (2003, 2006). Hebert and Woodford (2017) give a deeper explanation of the rational inattention theory by including explicitly information cost, justifying the sequential forward-looking information sampling behavior for finite time.

These are obtained implementing Grüne et al. (2015) routines adapted to a differential game context.

Calibration is similar to that proposed by Engwerda et al. (2013). However, our results are qualitatively robust to changes in the calibration. Further numerical simulations are available upon request. It is also worth noting that different calibrations may lead to different equilibrium, which in this game can be not unique (see Engwerda et al. 2013).

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Title: Public debt stabilization: the relevance of policymakers’ time horizons
Authors: Giovanni Di Bartolomeo
Marco Di Pietro
Enrico Saltari
Willi Semmler
Publication date: 07-07-2018
Publisher: Springer US
Published in: Public Choice / Issue 3-4/2018
Print ISSN: 0048-5829
Electronic ISSN: 1573-7101
DOI: https://doi.org/10.1007/s11127-018-0584-7

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