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The role of politics and instability on public spending dynamic and macroeconomic performance : theory and evidence from Turkey

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2003
İsmihan, Mustafa
This Ph.D. thesis comprises of two parts. Part I develops a framework to provide insights into the understanding of several political macro-economy issues related to fiscal policy making. This framework links the overall macroeconomic performance to the public spending and borrowing decisions. The key feature of this framework is that it makes a distinction between productive (e.g. public investment) and non-productive public spending (e.g. popular spending). It is shown that a high level of political instability may lead to myopic and populist policies and may be associated with less favorable macroeconomic performance in terms of not only future output and inflation but also future popular spending. Part I also suggests an alternative channel for expansionary or Non-Keynesian fiscal contractions based on the productivity enhancing role of productive public spending. It is shown that if the incumbent government reduces popular (productive) spending rather than productive (popular) spending, then Non-Keynesian (Keynesian) effects are achieved. Furthermore, it is shown that the favorable effects of public investment depends positively on its quality in this framework. Moreover, the net effect of productive spending financed by borrowing on the next period's macroeconomic performance depends on the benefits of productive spending relative to the costs of borrowing. Even under a capital borrowing rule higher public investment may yield unfavorable effects and also it may not necessarily prevent the strategic use of public investment, even though it prevents strategic debt accumulation. Part II investigates the effects of macroeconomic instability on capital accumulation and economic growth in the Turkish economy over the 1963-1999 period. Descriptive and econometric (time series) analyses suggest that macroeconomic instability not only deters capital accumulation and economic growth but it may also reverse the complementarity between public and private investment in the long-run.