Engineering Good Times: Fiscal Manipulation in a Global Economy

In a global economy, a country’s international economic ties affect both how desirable pre-electoral fiscal manipulation is to the government, and how costly it is to the government to engage in such manipulation. Governments are more likely to engage in pre-electoral fiscal manipulation when the country’s exchange rate is flexible and the domestic economy is highly open to international trade, and when the exchange rate is fixed and the domestic economy is relatively closed to international trade. This argument is tested empirically through a quantitative analysis of changes in government debt in twenty OECD countries from 1974 to 2008.