Do political institutions shape economic policy? I argue that this question should naturally appeal to economists. Moreover, the answer is in the affirmative, both in theory and in practice. In particular, recent theoretical work predicts systematic effects of electoral rules and political regimes on the size and composition of government spending. Results from ongoing empirical work indicate that such effects are indeed present in the data. Some empirical results are consistent with theoretical predictions: presidential regimes have smaller governments and countries with majoritarian elections have smaller welfare-state programs and less corruption. Other results present puzzles for future research: the adjustment to economic events appears highly institution-dependent, as does the timing and nature of the electoral cycle.

The absence of state capacities to raise revenue and to support markets is a key factor in explaining the persistence of weak states. This paper reports on an on-going project to investigate the incentive to invest in such capacities. The paper sets out a simple analytical structure in which state capacities are modeled as forward looking investments by government. The approach highlights some determinants of state building including the risk of external or internal conflict, the degree of political instability, and dependence on natural resources. Throughout, we link these state capacity investments to patterns of development and growth.

The authors study collective choice of fiscal policy in 'federations.' Local policy redistributes across individuals and affects the probability of local shocks. Federal policy shares international risk but may induce local governments to enact policies that increase local risk. The resulting trade-off between risk-sharing and moral hazard is different under alternative fiscal constitutions because the constitutions create different incentives for policymakers and voters and give rise to different political equilibria. The authors specifically contrast vertically ordered systems, like the European Community, with horizontally ordered systems, like the United States. Under appropriate institutions, centralization of functions and power can mitigate the moral hazard problem. Copyright 1996 by The Econometric Society.

This paper demonstrates how time consistency of the Ramsey policy -the optimal fiscal and monetary policy under commitment -can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite a general Ramsey policy, including timevarying polices with positive inflation and positive nominal interest rates.

This paper demonstrates how time consistency of the Ramsey policy–the optimal fiscal and monetary policy under commitment–can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite general Ramsey policies, including timevarying polices with positive inflation and positive nominal interest rates. We compare our results with