FISCAL STRUCTURES AND ECONOMIC GROWTH: INTERNATIONAL EVIDENCE

Our paper systematically examines the effects of fiscal structure on economic growth. We find that for developing countries, debt-financed increases in government expenditure retard growth and tax-financed increases stimulate growth, while for developed countries, debt-financed increases in government expenditure do not affect growth and tax-financed increases lower growth. We impose the government budget constraint on the regression equations so that the precise changes in fiscal policy can be identified (e.g., the effect of a debt-financed increase in health expenditure), employing a pooled cross-section, time-series sample and fixed- and random-effect methods. (JEL 04, E6)     

STATE TAXES AND LEGISLATIVE TURNOVER IN THE UNITED STATES

Mounting empirical evidence suggests that term limits and, by extension, higher legislative turnover increase the overall size of government and change its spending composition. However, less is known about the turnover's impact on the composition of tax revenues. This study fills this void by exploiting exogenous variation in term limits and redistricting as instruments for legislative turnover, which is found to be positively associated with most state taxes except for the corporate income tax. We hypothesize that the negative association between legislative turnover and corporate income taxes might be influenced by a higher propensity of business owners to enter term-limited state legislatures. (JEL H7, H3)     

REAL EXCHANGE RATE,MONETARY POLICY,AND THE U.S. ECONOMY: EVIDENCE FROM A FAVAR MODEL

This paper examines the effects of exchange rate depreciation to the U.S. economy in a factor‐augmented vector autoregression model using monthly data of 148 variables for the post–Bretton Woods period of 1973–2017. Exchange rate shock is identified to reflect exogenous disturbances to the foreign exchange market, and movements in exchange rate that are not accounted for by changes in the U.S. monetary policy. We find that depreciation is expansionary and inflationary to the broad U.S. economy, the current account improves over time conforming to the J‐curve theory, and monetary policy is leaning against the wind. (JEL E3, E5, F31, F32, F41)     

BANKS,FREE BANKS,AND U.S. ECONOMIC GROWTH

The “Federalist financial revolution” may have jump‐started the U.S. economy into modern growth, but the Free Banking System (1837–1862) did not play a direct role in sustaining it. Despite lowering entry barriers and extending banking into developing regions, we find in county‐level data that free banks had little or no effect on growth. The result is not just a symptom of the era, as state‐chartered banks seem to have strong and positive effects on manufacturing and urbanization. (JEL G21, N21, O43)     

POLITICAL IDEOLOGY AND ECONOMIC GROWTH: EVIDENCE FROM THE FRENCH DEMOCRACY

We provide a test of the impact of voters' political ideology on economic growth and of the role of preferences for government size as a transmission channel. We focus on France from the beginning of its stable democratic experience in 1871. A move of voters' ideology to the right increases economic growth over the total observation period. However, the growth effect of ideology is mediated by voters' preferences for government size only during the post‐World War II period. For reverse causality concerns, we use the political ideology of other historical democracies as an instrument variable for France's ideology. (JEL E6, O43, H11)     

MONETARY AND FISCAL POLICY DESIGN AT THE ZERO LOWER BOUND: EVIDENCE FROM THE LAB

The global economic crisis of 2007–2008 has pushed many advanced economies into a liquidity trap. We design a laboratory experiment on the effectiveness of policy measures to avoid expectation‐driven liquidity traps. Monetary policy alone is not sufficient to avoid liquidity traps, even if it preventively cuts the interest rate when inflation falls below a threshold. However, monetary policy augmented with a fiscal switching rule succeeds in escaping liquidity trap episodes. We measure the effect of fiscal policy on expectations, and report larger‐than‐unity fiscal multipliers at the zero lower bound. Experimental results in different treatments are well explained by adaptive learning. (JEL E70, C92, D83, D84, E52, E62)     

THE DETERMINANTS OF U.S. STATE ECONOMIC GROWTH: A LESS EXTREME BOUNDS ANALYSIS

This study investigates U.S. state economic growth from 1970 to 1999. I innovate on previous studies by developing a new approach for addressing "model uncertainty" issues associated with estimating growth equations. My approach borrows from the "extreme bounds analysis" approach of Leamer while also addressing concerns raised by Granger and Uhlig, Sala-i-Martin, and others that not all specifications are equally likely to be true. I then apply this approach to identify "robust" determinants of state economic growth. My analysis confirms the importance of productivity characteristics of the labor force and industrial composition of a state's economy. I also find that policy variables such as (1) size and structure of government and (2) taxation are robust and economically important determinants of state economic growth. ( JEL 040, 051, H10, H20, H30, H70, R11, R58, C51)     

FISCAL DECENTRALIZATION AND ECONOMIC GROWTH: SPENDING VERSUS REVENUE DECENTRALIZATION

This article examines whether the efficiency gains accompanying fiscal decentralization generate higher growth in more decentralized economies, applying pooled‐mean group techniques to a panel dataset of 23 Organization for Economic Co‐operation and Development (OECD) countries, 1972–2005. We find that spending decentralization has tended to be associated with lower economic growth while revenue decentralization has been associated with higher growth. Since OECD countries are substantially more spending than revenue decentralized, this is consistent with Oates' (1972) hypothesis that maximum efficiency gains require a close match between spending and revenue decentralization. It suggests reducing expenditure decentralization, and simultaneously increasing the fraction financed locally, would be growth‐enhancing. (JEL E62, H71, H72)     

PARTY AFFILIATION AND PUBLIC SPENDING: EVIDENCE FROM U.S. GOVERNORS

This paper investigates whether the party affiliation of governors (Democrat or Republican) has an impact on the allocation of state expenditures. Exploiting gubernatorial election results from 1960 to 2012 and a Regression Discontinuity Design (RDD), we find that Democratic governors allocate a larger share of their budget to health/hospitals and education sectors. We find no significant impact of the political party of governors on total spending, only on the allocation of funds. The results are robust to a wide range of controls and model specifications. (JEL D72, H75, H72)     

FISCAL FEDERALISM,DECENTRALIZATION, AND ECONOMIC GROWTH: A META‐ANALYSIS

The theoretical literature on fiscal federalism has identified several channels through which government decentralization could affect economic growth. Much of the literature focuses on the efficiency aspects of a decentralized provision of public services, but decentralization may also increase growth by raising the ability of the political system to innovate and carry out reforms. In contrast, some authors argue that decentralization increases corruption and government inefficiency, and thus may diminish growth. Given this theoretical ambiguity, several studies have attempted to identify the effect of decentralization on economic growth empirically over the last two decades. We review and conduct a meta‐analysis of this empirical literature. Based on our analysis, we point out open questions and discuss possible ways to answer them. (JEL H77, O43, C52)     

FDI AND INCOME INEQUALITY: EVIDENCE FROM A PANEL OF U.S. STATES

This study employs state‐level panel data to explore the relationship between inward foreign direct investment (FDI) and income inequality in the United States. Using panel cointegration techniques that allow for cross‐sectional heterogeneity and cross‐sectional dependence, we find that, in the long run, FDI exerts a significant and robust negative effect on income inequality in the United States. This result for the United States as a whole does not imply that FDI narrows income gaps in each individual state. There is considerable heterogeneity in the long‐run effects of FDI on income inequality across states, with some states (21 out of 48 cases) exhibiting a positive relationship between FDI in income inequality.(JEL F21, D31, C23)     

CORRUPTION,PRODUCT MARKET COMPETITION,AND INSTITUTIONAL QUALITY: EMPIRICAL EVIDENCE FROM THE U.S. STATES

This article argues that the effect of corruption on competition is dependent on the institutional environment. When institutions are relatively efficient, observed corruption is likely to be associated with relatively less competition. Conversely, in areas with low quality institutions (e.g., excessively burdensome regulations), corruption may lead to relatively more competition. I employ unique data on competition, corruption, and institutional quality across U.S. states from 1997 to 2009 and report that a higher level of corruption is associated with relatively more competition in states with low levels of institutional quality. However, as institutional quality improves, the effect of corruption worsens. Thus, institutional quality is a fundamental determinant of the corruption‐competition relationship. Improving institutional quality, while at the same time reducing corruption, will increase competition and likely improve economic outcomes. (JEL D73, O17, L26)     

U.S. CREDIT UNIONS: SURVIVAL,CONSOLIDATION, AND GROWTH

This study uses hazard function estimations and time‐series and cross‐sectional growth regressions to examine the impact of exit through merger and acquisition (M&A) or failure, and internally generated growth, on the firm‐size distribution within the U.S. credit union sector. Consolidation through M&A was the principal cause of a reduction in the number of credit unions, but impact on concentration was small. Divergence between the average internally generated growth of smaller and larger credit unions was the principal driver of the rise in concentration. (JEL G21)     

TAXATION, AGGREGATE ACTIVITY AND ECONOMIC GROWTH: CROSS-COUNTRY EVIDENCE ON SOME SUPPLY-SIDE HYPOTHESES

Data from sixty-three countries are used to examine the impact of average and marginal tax rates on the level and growth of economic activity. Apparent negative effects of tax rates on growth disappear upon controlling for (1) potential endogeneity of average tax rates to per capita income and (2) the relation between economic growth and per capita income. However, controlling for average tax rates, increases in marginal tax rates have negative effects on the level of economic activity. This evidence supports the hypothesis that reductions in the "progressivity" of tax rates induce a parallel shift upward in the growth path.     

HYSTERESIS IN UNEMPLOYMENT EVIDENCE FROM 48 U.S. STATES

Studies using standard unit-root tests generally cannot reject the hypothesis of a unit root in unemployment rates. These findings have been interpreted as supporting the hysteresis hypothesis. We demonstrate that the failure to reject the null may be due to the low power of the tests. We analyze unemployment rates of 48 U.S. contiguous states using a more powerful panel-based test which exploits cross-section restrictions on the constituent series. The critical values are simulated tailored to our sample size. We reject the null decisively, casting some doubt on the hysteresis hypothesis for the United States.     

OUTSOURCING TYPES, RELATIVE WAGES, AND THE DEMAND FOR SKILLED WORKERS: NEW EVIDENCE FROM U.S. MANUFACTURING

Existing studies on the impact of outsourcing on relative wages and the demand for skilled workers mainly focus on aggregate outsourcing, in which imported intermediate inputs are used as a proxy. We depart from the existing studies by focusing on various types of outsourcing based on the six-digit NAICS U.S. manufacturing data. We show that downstream materials and service outsourcing are skill biased, whereas upstream materials outsourcing is not. We also produce other supplementary results pertaining to the impact of technology, different capital inputs on relative wages, and the demand for skilled workers. ( JEL C33, F14, F15)     

AUDIT STATE DEPENDENT TAXPAYER COMPLIANCE: THEORY AND EVIDENCE FROM COLOMBIA

We develop and analyze a dynamic model of individual taxpayer compliance choice that predicts “audit state dependent taxpayer compliance,” by distinguishing between forward-looking versus myopic versus naïve behavior. We then test experimentally the audit state dependent model by reporting the results from the first tax compliance experiment run in Colombia. We find that subjects' compliance rates increase with greater enforcement. We also find more novel results: fine rates should be increased after an audit, and “nudging” myopic individuals toward reporting a constant rather than a fluctuating proportion of income would benefit both the taxpayer and the tax authority.(JEL H26, C91)     

ECONOMIC GROWTH AND THE SEPARATION OF CHURCH AND STATE: THE FRENCH CASE

This article provides a test of the secularization hypothesis, which argues that economic growth, industrialization, increased literacy, and low fertility decrease religiosity. It focuses on the elections of the secular politicians who voted in favor of the separation between Church and State in the French Parliament in 1905. If the secularization hypothesis is correct, these secular politicians should have been elected in the most developed areas of France at the turn of the twentieth century. Contrary to the predictions of the secularization hypothesis, we find that the support for secular politicians originated in the rural areas of France. (JEL Z12, D72, N43)     

PRODUCTIVITY EFFECTS OF PUBLIC CAPITAL MAINTENANCE: EVIDENCE FROM U.S. STATES

This article assesses the productivity effects of infrastructure operation and maintenance (O&M) spending by state and local governments in the 48 contiguous U.S. states over the period 1978–2000. We explicitly account for transboundary spillovers of capital and O&M spending and follow a semiparametric methodology that allows us to estimate state‐specific output elasticities. We find strong evidence that in all 48 states the cross‐state spillover effects of O&M outlays on productivity exceed their within‐state impacts and are substantially higher than the spillover effects of capital expenditure. (JEL C14, E22, E62, H76, O11, O47, R11)