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Revisiting the political economy of fiscal adjustments

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  • Ziogas, Thanasis
  • Panagiotidis, Theodore

Abstract

The political economy of fiscal adjustments is revisited within the framework of Alesina et al. (1998). A panel that spans from 1970 to 2016 for three datasets (European Union, Eurozone and OECD-19) is constructed. Both descriptive statistics and regression analysis is employed. We assess how successful are policies for budget consolidation. Panel logit and heteroskedasticity probit evaluate the probability of government’s survival after having engaged in tight (loose) fiscal policies. Economic variables and political characteristics of the cabinets are taken into account in the specifications. We reveal that the fiscal balance is an insignificant predictor for the changes of the prime minister or the ideology of the cabinet. Inflation and unemployment rate are significant and positively related to changes in government while spending adjustment composition dummies are negative and significant predictors for such changes. Revenue based adjustments have no effect on re-election prospects. Our results are robust to sensitivity checks, including various sub-sample analysis and non-linear specifications.

Suggested Citation

  • Ziogas, Thanasis & Panagiotidis, Theodore, 2021. "Revisiting the political economy of fiscal adjustments," Journal of International Money and Finance, Elsevier, vol. 111(C).
  • Handle: RePEc:eee:jimfin:v:111:y:2021:i:c:s0261560620302680
    DOI: 10.1016/j.jimonfin.2020.102312
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    More about this item

    Keywords

    Fiscal adjustments; Spending cuts; Cabinets’ survival; Heteroskedasticity probit;
    All these keywords.

    JEL classification:

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

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