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The Political Color Of Fiscal Responsibility

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  • Andreas Müller
  • Kjetil Storesletten
  • Fabrizio Zilibotti

Abstract

We propose a dynamic general equilibrium model that yields testable implications about the fiscal policy run by governments of different political color. Successive generations of voters choose taxation, expenditure, and government debt through repeated elections. Voters are heterogeneous by age and by the intensity of their preferences for public good provision. The political equilibrium switches stochastically between left- (pro-public goods) and right-leaning (pro-private consumption) governments. A shift to the left (right) is associated with a fall (increase) in government debt, an increase (fall) in taxation, and an increase (fall) in government expenditures. However, left-leaning governments engage in more debt accumulation during recessions. These predictions are shown to be consistent with the time-series evidence for the United States in the postwar period, and also with the evidence for a panel of OECD countries.
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Suggested Citation

  • Andreas Müller & Kjetil Storesletten & Fabrizio Zilibotti, 2016. "The Political Color Of Fiscal Responsibility," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 252-302, February.
  • Handle: RePEc:bla:jeurec:v:14:y:2016:i:1:p:252-302
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    File URL: http://hdl.handle.net/10.1111/jeea.2016.14.issue-1
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Scholl, Almuth, 2017. "The dynamics of sovereign default risk and political turnover," Journal of International Economics, Elsevier, vol. 108(C), pages 37-53.
    2. Murtinu, Samuele & Piccirilli, Giulio & Sacchi, Agnese, 2016. "Fiscal Policy, Government Polarization, and the Economic Literacy of Voters," MPRA Paper 74864, University Library of Munich, Germany.
    3. Giorgio Bellettini & Paolo Roberti, 2020. "Politicians’ coherence and government debt," Public Choice, Springer, vol. 182(1), pages 73-91, January.
    4. Corsetti, G. & Erce, A. & Uy, T., 2017. "Official Sector Lending Strategies During the Euro Area Crisis," Cambridge Working Papers in Economics 1730, Faculty of Economics, University of Cambridge.
    5. Carmine Gabriele & Aitor Erce & Marialena Athanasopoulou & Juan Rojas, 2017. "Debt Stocks Meet Gross Financing Needs: A Flow Perspective into Sustainability," Working Papers 24, European Stability Mechanism.
    6. Giancarlo Corsetti & Aitor Erce & Timothy Uy, 2020. "Official sector lending during the euro area crisis," The Review of International Organizations, Springer, vol. 15(3), pages 667-705, July.
    7. Potrafke, Niklas, 2017. "Partisan politics: The empirical evidence from OECD panel studies," Journal of Comparative Economics, Elsevier, vol. 45(4), pages 712-750.
    8. Tetsuo Ono & Yuki Uchida, 2018. "Political Economy of Taxation, Debt Ceilings, and Growth," Discussion Papers in Economics and Business 18-22, Osaka University, Graduate School of Economics.
    9. Uchida, Yuki & Ono, Tetsuo, 2020. "Generational Distribution of Fiscal Burdens: A Positive Analysis," MPRA Paper 102826, University Library of Munich, Germany.
    10. Alesina, A. & Passalacqua, A., 2016. "The Political Economy of Government Debt," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.),Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2599-2651, Elsevier.
    11. Antonio Fatás & Atish R. Ghosh & Ugo Panizza & Andrea F Presbitero, 2019. "The Motives to Borrow," IMF Working Papers 2019/101, International Monetary Fund.
    12. Potrafke, Niklas, 2017. "Partisan politics: The empirical evidence from OECD panel studies," Journal of Comparative Economics, Elsevier, vol. 45(4), pages 712-750.
    13. Fatás, Antonio & Ghosh, Atish & Panizza, Ugo & Presbitero, Andrea, 2019. "The Motives to Borrow," CEPR Discussion Papers 13735, C.E.P.R. Discussion Papers.
    14. Andersen, Torben M., 2019. "Intergenerational conflict and public sector size and structure: A rationale for debt limits?," European Journal of Political Economy, Elsevier, vol. 57(C), pages 70-88.
    15. Timm M. Prein & Almuth Scholl, 2018. "The Impact of Bailouts on Political Turnover and Sovereign Default Risk," Working Paper Series of the Department of Economics, University of Konstanz 2018-04, Department of Economics, University of Konstanz.
    16. Tatiana Kirsanova & Celsa Machado & Ana Paula Ribeiro, 2020. "Tight and Loose, and Red and Blue: A 'Dance' of Macro Policies in the US," Working Papers 2020_14, Business School - Economics, University of Glasgow.
    17. Giancarlo Corsetti & Aitor Erce & Timothy Uy, 0. "Official sector lending during the euro area crisis," The Review of International Organizations, Springer, vol. 0, pages 1-39.
    18. Arai, Real & Naito, Katsuyuki & Ono, Tetsuo, 2018. "Intergenerational policies, public debt, and economic growth: A politico-economic analysis," Journal of Public Economics, Elsevier, vol. 166(C), pages 39-52.
    19. Cui, Wei, 2017. "Macroeconomic effects of delayed capital liquidation," LSE Research Online Documents on Economics 86156, London School of Economics and Political Science, LSE Library.
    20. Ondrej Schneider, 2019. "Partisan Fiscal Policy: Evidence from Central and Eastern Europe," CESifo Working Paper Series 8014, CESifo.
    21. Ryosuke Okazawa & Katsuya Takii, 2019. "Intergenerational Conflict Over Consumption Tax Hike: Evidence from Japan," OSIPP Discussion Paper 19E009, Osaka School of International Public Policy, Osaka University.
    22. Ricardo Duque Gabriel, 2020. "Who should you vote for? Empirical evidence from Portuguese local governments," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 19(1), pages 5-31, January.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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