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THE UNIVERSITY OF CALGARY

TH

E POLITICAL BUSINESS CYCLE

AN D FISCA

L POLICY IN CANADA

b y

Stephe

n Josep h Harpe r A THESI S

SUBMITTE

D TO THE FACULTY OF GRADUATE STUDIES

PARTIA

L FULFILLMENT OF THE REQUIREMENTS FOR

DEGRE

E OF MASTER OF ARTS

DEPARTMEN

T OF ECONOMICS

CALGARY

, ALBERTA

SEPTEMBER

, 1991 "Stephe n J . Harper 1991

Abstract

Thi s thesis investigates the premise that Keynesian fisca l policy is subject to the influence of political parameter s that lessen its effectiveness as a stabilization tool . The premise is founded upon the assumption that policymaker s are motivated by political goals, in particular electora l goals, rather than the social optima assumed by traditiona l macroeconomic policy prescriptions.

Theorie

s of a deliberately engineered political busines s cycle emanate from a number of disciplines and economi c schools, the most important of which is the interdisciplinar y area of Public Choice. Earlier theories wer e based on Keynesian models and Phillips' Curve analysis. Ther e have only recently been applications of rational modellin g techniques to theories of political economy.

Testin

g ha s been somewhat discontinuous and inconclusive due t o th e multitud e of theoretical approaches. I n this thesis a multivariate reaction function for the

Canadia

n federal budget balance is constructed for the perio d fro m 1953 to 1990. Countercyclical and electoral element s emerge as the most important factors in explaining fisca l policy. While the electoral factor represents a major constrain t upon the practice of appropriate fiscal policy, th e result s ten d not to support the premise of deliberate electora l engineering predicted by theory. Accordingly new ii i directions for empirical and theoretical research are suggested i v

Acknowledgements

Thank s are due first and foremost to my supervisor, Dr. Fran k Atkins. Dr. Atkins demonstrated both consistent interes t and flexible accommodation while overseeing this work . He went to considerable pains to keep on track a difficul t student who frequently had other pressing priorities . In this regard, Dr. Atkins can take a great deal o f credit for the fact that this thesis was indeed complete d . I would also like to thank collectively all the staff o f th e Department of Economics at the University of Calgary wh o hav e shown such interest in my education during my undergraduat e and graduate years. I hope none will be offende d i f I singl e out for thanks Dr. Robert Mansell, who originall y encouraged me to undertake this project and who ha s bee n a great supporter of both my academic and non academi c pursuits.

Severa

l individuals have made direct contributions to thi s project which are greatly appreciated. Messrs. John

Haywar

d and Peter Devries of the Department of Finance,

Ottawa

, provided helpful documents and discussion of concept s an d issue s i n thi s particular public policy field. Mr . Herb O'Heron, now of the Canadian Association of

Universitie

s and Colleges, Ottawa, provided his pioneering an d unpublishe d wor k in this area. Finally Ms. Niki Brodie V was extremely forthcoming with historical data on behalf of Gallu p Canada Inc., Toronto.

Acknowledgemen

t is also extended to Ms. Darlene Chrapko an d Ms. Laureen Teskey, who provided extraordinarily prompt an d accurat e assistance, as well as numerous corrections, in th e preparation of this manuscript. Las t but by no means least i s the recognition of the suppor t give n by my family and many friends. Special recognitio n i s due to my brothers. Robert assisted in trackin g down information not available in Calgary. Grant especiall y deserves great thanks for his financial and persona l support as my roommate during this entire process. v i

Dedication

Da d an d Mom fo r al l your love and support. vi i

Table of ContentsTable o f Contents

Approval Page.

iiApproval Page ii

Abstract

Abstract

ii...... ii i i

Acknowledgements.

Acknowledgement

s vv

Dedicatio

nDedication.•.•••. vi i vii Tabl eTable o f of-

Contents

Contents. viiiviii

List of Tables. xxList o f Tables

List of Graphs. •List o f Graphs x ixi

Chapter OneChapter One

1.1 1. 1

Introduction

Introduction

" .., 1 1 1.2 1. 2

Policy Record.

Policy Record

4 4 1.3 1. 3

Overview•.•

Overview

... 14 14

Chapter TwoChapter Two

2.12.1StandardStandardTheory of Fiscal PolicyPolicy.•.•Theory o f Fiscal...... 1515

2. 2

2.2 Theoriesofo f the PoliticalPolitical BusinessBusiness CycleTheories the Cycle. .... 23

23
Theories2.2.12.2.1MarxistMarxistTheories •.•.••• . 24 24
2.2.

2OrthodoxOrthodox2.2.2 FormulationsFormulation...s •. ;. 2626

2.2. 3

2.2.3 Conservative CritiquesConservative Critiques ••••••3737..

2.2.

4NewNew2.2.4 RevisionsClassicalClassicalRevisions .. 4444

2.2.52.2.5

Summary"

Summary

5353
Empirical2.32.3PreviousPrevious Empirical ResearchResearch.......••.. 57 57
2.3. 1

2.3.1 Frey-Schneider6262ModelFrey-Schneider Model .••.

2.3.

2BudgetBudget2.3.2 BalanceFunctionsFunctions•Balance ...•..• 6868

2.3.32.3.3 Integrated Tests.Integrated Tests .••..•. ..••• 75

75

2.3.42.3.4CanadianCanadianEvidenceEvidence••..•••. 78

78

Chapter ThreeChapter Three

Introduction.Introduction.3.13.1 . 82

82

3.23.2 ModelModel .•..•.•• 8484

3.2. 1

3.2.1 CyclicalVariablesVariablesEconomicCyclical Economic ......•.•.•. 9090

3.2. 2

3.2.2 Structural Economic VariablesStructural Economic Variables •. 91

91
3.2. 3

3.2.3 CyclicalPolitical VariablesVariablesCyclical Political...••• 9292

3.2. 4

Structural

Structural3.2.4 Political

Political

Variables

Variables

96
96
3.2.

5ShockShock3.2.5 VariablesVariables...•.•.•.•.•.••. 99

99
3. 3

Result

s

1013.3 101

Results.""""""""""""""""""""""""""""" "

3.3. 1

Policy Function with Cyclical

3.3.1 Policy Function with Cyclical

EconomicEconomicVariables.•••...••. ;. 101 101
3.3. 2

3.3.2 Policy Function

Structural

Structuralplus

Policy Function plus

Economi

c VariablesEconomic Variables....••••••••.••••• 104

104
v i ii viii

Table of Contents (cont.)

3.3.3 Policy Function plus Cyclical

Political Variables.................. 106

3.3.4 Policy Function plus Structural

Political Variables.................. 115

3.3.5 Policy plus Shock

Variables '. . . . . . . . . 116

3.3.6 Summary.............................. 123

Chapter Four

4.1 Summary and Conclusions..................... 133

4.2 Directions for Further Research............. 137

Bibliography

Government Publications..................... 142

Articles

.................................... 142 Books ....................................... 151 Appendix A: Measurement of Fiscal Policy.............. 153 Appendix B: Data and Sources ....•••• 160 ix

List of Tables

Tabl e : Page : 1. 1

Discretionar

y Budgetary Actions of the Mulroney

Government

1984-199

1 1 2 3. 1

Summar

y Statistics on Economic Variables in Levels, 1953Q

1 to 1990Q4 86

3. 2

Summar

y Statistics on Economic Variables in first difference s over four quarters, 1953Q1 to 1990Q4 87 3. 3 Polic y Function with Cyclical Economic Variables 103 3. 4 Polic y Function plus Structural Economic Variables 105 3.5 a Polic y Function against Electoral Quarters 107 3.5 b Polic y Function against Electoral Years 108 3.5 c Polic y Function plus the Electoral Cycle Variable 109 3.6 a Polic y Function with Popularity Variables 112 3.6 b Polic y Function with Frey-Schneider Popularity

Variable

s 113 3. 7 Polic y Function with Structural Political

Variable

s 117 3.8 a Polic y Function broken into Subperiods, 1953-1968 119 3.8 b Polic y Function broken into Subperiods, 1968-1979 120quotesdbs_dbs47.pdfusesText_47

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