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Fiscal Policy in a Debt Crisis - A Model

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  • Afflatet, Nicolas

    (Helmut Schmidt University, Hamburg)

Abstract

In the existing literature, fiscal policy in times of budget crises is considered above all from an empirical point of view. Until now, no model explaining the processes and forces at work has been developed. This article closes this gap. The model presented is based on the theory of political business cycles and the market discipline hypothesis. Unemployment, the voters’ preference for a sustainable deficit policy and the probability of a sovereign default are the determinants influencing the deficit. As a result the deficit falls high if fiscal policy is effective in reducing unemployment, if voter prefer deficits rather than balanced budgets, if financial markets do not react to lasting deficits and if the natural rate of unemployment is high.

Suggested Citation

  • Afflatet, Nicolas, 2015. "Fiscal Policy in a Debt Crisis - A Model," Working Paper 160/2015, Helmut Schmidt University, Hamburg.
    • Handle: RePEc:ris:vhsuwp:2015_160
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    Citations

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    Cited by:

    1. Nicolas Afflatet & Stephanos Papadamou, 2016. "Public debt and borrowing: Are governments disciplined by financial markets?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1225346-122, December.
    2. Beckmann, Klaus B., 2017. "Bounded rationality in differential games," Working Paper 178/2017, Helmut Schmidt University, Hamburg.
    3. Wang, Xue & Bohn, Frank & Veiga, Francisco José, 2023. "When do more selfish politicians manipulate less, not more?," European Journal of Political Economy, Elsevier, vol. 77(C).
    4. Bantle, Melissa & Muijs, Matthias, 2018. "A new price test in geographic market definition – an application to german retail gasoline market," Working Paper 180/2018, Helmut Schmidt University, Hamburg.

    More about this item

    Keywords

    budget consolidation; debt crisis; political business cycles; market discipline hypothesis; economic voting;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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