Discussion Paper Details

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Title: Economic and Politico-Economic Equivalence

Author(s): Martin Gonzalez-Eiras and Dirk Niepelt

Publication Date: November 2012

Keyword(s): equivalence, government debt, politico-economic equilibrium, social security reform and tax policy

Programme Area(s): International Macroeconomics and Public Economics

Abstract: We extend "economic equivalence" results, like the Ricardian equivalence proposition, to the political sphere where policy is chosen sequentially. We derive conditions under which a policy regime (summarizing admissible policy choices in every period) and a state are "politico-economically equivalent" to another such pair, in the sense that both pairs give rise to the same equilibrium allocation. The equivalence conditions help to identify factors that render institutional change non-neutral. We exemplify their use in the context of several applications, relating to social security reform, tax-smoothing policies and measures to correct externalities.

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Bibliographic Reference

Gonzalez-Eiras, M and Niepelt, D. 2012. 'Economic and Politico-Economic Equivalence'. London, Centre for Economic Policy Research.