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The Stability and Growth Pact: A European Answer to the Political Budget Cycle?

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  • Thierry Warin

    ()

  • Kenneth Donahue

Abstract

The existing literature on political budget cycles looks at the temptation for incumbent governments to run a greater deficit before an election by considering the characteristics of the incumbent. We propose here to look at the signals the incumbent receives from the voters. For this purpose, we consider the votes from the previous national elections and see whether they may influence the incumbent government to run a sound fiscal policy or an expansionary fiscal policy. However, since 1993 Europe has been equipped with two fiscal rules: a deficit and a debt ceiling. In this context, can we find evidence of a “political budget cycle” before 1993, and did the fiscal rules prevent the existence of a “political budget cycle” afterwards? To address these questions, we use a cross-sectional time series analysis of European countries from 1979 to 2005.

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File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0606.pdf
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Bibliographic Info

Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0606.

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Length: 24 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:mdl:mdlpap:0606

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Keywords: Stability and Growth Pact; Political Business Cycle; Political budget Cycle; Partisan Theory;

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  17. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August.
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Cited by:
  1. Georgios Efthyvoulou, 2010. "Political Budget Cycles in the European Union and the Impact of Political Pressures: A dynamic panel regression analysis," Birkbeck Working Papers in Economics and Finance 1002, Birkbeck, Department of Economics, Mathematics & Statistics.
  2. Jakob Haan & Jeroen Klomp, 2013. "Conditional political budget cycles: a review of recent evidence," Public Choice, Springer, vol. 157(3), pages 387-410, December.

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