Developing countries exhibit wide differences in their fiscal and monetary policies, particularly with regard to inflation and fiscal deficits. The purpose this project is to explain these differences by formulating and testing alternative theories of fiscal and monetary policies. One of the major questions to be address is whether the observed policies are in accord with optimal government behavior. Preliminary empirical results suggest that, for most part, developing countries adopt policies which are far from optimum. The main focus of this research is to develop and analyze alternative explanations for why different countries deviate from optimal policy behavior in the way they do. A political model of reputation that associates the effectiveness of reputational incentives to observable characteristics of the political system will be developed and tested. In addition, a political theory of tax reform will also constructed and tested. This project is important because it may suggest opportunities for institutional reform and how international organizations should deal with developing countries.
