Does right or left matter? Cabinets, credibility and fiscal adjustments
This paper uses the widely held assumption that left-wing cabinets prefer a larger size of government than right-wing cabinets to answer the question: does the pair cabinet ideology - fiscal action affect the persistence of fiscal adjustments? For a panel of OECD countries from 1960 to 1995, we find that left and right-wing cabinets are partisan in the expected way, namely, when cutting the deficit, the left relies on tax increases and the right on spending cuts. Our testable hypothesis is that cabinets signal commitment and gain credibility by pursuing fiscal adjustments in ways not favored by their constituents, i.e., the left cuts expenditures and the right increases taxes. Probit estimates of the impact of adjustment characteristics on the likelihood of success provide evidence in favor of the fact that cuts in spending by the left and tax increases by the right lead to more persistent adjustments than the reverse. These results are consistent with the literature on fiscal adjustments that has revealed that adjustments pursued by spending cuts are more persistent. We identify other adjustment characteristics that influence the persistence of the deficit cut: coalition cabinets, as well as majority cabinets, are less likely to be successful; a high level of public debt or a public debt that has been growing in the recent past tend to make the adjustment more credible. We also find evidence that private investment responds to the pair cabinet ideology - fiscal action in a way that is consistent with our hypothesis. First, cuts in spending by the left have a stronger stimulative effect on investment than cuts by the right, whereas increases in taxes by the left actually contract private investment, in contrast to the positive effect of tax increases by the right.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
- Edin, Per-Anders & Ohlsson, Henry, 1991.
"Political determinants of budget deficits: Coalition effects versus minority effects,"
European Economic Review,
Elsevier, vol. 35(8), pages 1597-1603, December.
- Edin, P-A. & Ohlsson, H., 1990. "Political Determinants Of Budget Deficits: Coalition Effects Versus Minority Effects," Papers 1990k, Uppsala - Working Paper Series.
- Francesco Giavazzi & Marco Pagano, 1990.
"Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries,"
in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122
National Bureau of Economic Research, Inc.
- Giavazzi, Francesco & Pagano, Marco, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," CEPR Discussion Papers 417, C.E.P.R. Discussion Papers.
- Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries," NBER Working Papers 3372, National Bureau of Economic Research, Inc.
- F. Giavazzi & M. Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of two Small Euopean Countries," Working Papers 89, Dipartimento Scienze Economiche, Universita' di Bologna.
- Roberto Perotti, 1999. "Fiscal Policy in Good Times and Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1399-1436.
- Carlos Mulas-Granados, 2003. "The Political and Economic Determinants of Budgetary Consolidation in Europe," European Political Economy Review, European Political Economy Infrastructure Consortium, vol. 1(Spring), pages 15-39.
- Alesina, A. & Drazen, A., 1991.
"Why Are Stabilizations Delayed?,"
6-91, Tel Aviv - the Sackler Institute of Economic Studies.
- Mariano Tommasi, 1995.
"Why Does it Take a Nixon to go to China?,"
UCLA Economics Working Papers
728, UCLA Department of Economics.
- Giavazzi, Francesco & Pagano, Marco, 1995.
"Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience,"
CEPR Discussion Papers
1284, C.E.P.R. Discussion Papers.
- Francesco Giavazzi & Marco Pagano, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," NBER Working Papers 5332, National Bureau of Economic Research, Inc.
- Giuseppe Bertola & Allan Drazen, 1991.
"Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity,"
NBER Working Papers
3844, National Bureau of Economic Research, Inc.
- Bertola, Giuseppe & Drazen, Allan, 1993. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," American Economic Review, American Economic Association, vol. 83(1), pages 11-26, March.
- Bertola, Giuseppe & Drazen, Allan, 1991. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," CEPR Discussion Papers 599, C.E.P.R. Discussion Papers.
- Bertola, G. & Drazen, A., 1991. "Trigger Pointsand Budget Cuts ; Explaining the Effects of Fiscal Austerity," Papers 26-91, Tel Aviv.
- Tsebelis, George, 1995. "Decision Making in Political Systems: Veto Players in Presidentialism, Parliamentarism, Multicameralism and Multipartyism," British Journal of Political Science, Cambridge University Press, vol. 25(03), pages 289-325, July.
- Lambertini Luisa & Tavares José A, 2005. "Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for the EMU," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-30, December.
- Mark Hallerberg & Jürgen von Hagen, 1999.
"Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union,"
in: Fiscal Institutions and Fiscal Performance, pages 209-232
National Bureau of Economic Research, Inc.
- Mark Hallerberg & Jurgen von Hagen, 1997. "Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union," NBER Working Papers 6341, National Bureau of Economic Research, Inc.
- Lane, Philip R. & Perotti, Roberto, 2003.
"The importance of composition of fiscal policy: evidence from different exchange rate regimes,"
Journal of Public Economics,
Elsevier, vol. 87(9-10), pages 2253-2279, September.
- Philip R. Lane & Roberto Perotti, 2001. "The Importance of Composition of Fiscal Policy: Evidence from Different Exchange Rate Regimes," Trinity Economics Papers 200116, Trinity College Dublin, Department of Economics.
- Philip R. Lane & Roberto Perotti, 2001. "The Importance of Composition of Fiscal Policy: Evidence from Different Exchange Rate Regimes," CEG Working Papers 200111, Trinity College Dublin, Department of Economics.
- Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
- Alan S. Blinder & Douglas Holtz-Eakin, 1983.
"Public Opinion and the Balanced Budget,"
NBER Working Papers
1234, National Bureau of Economic Research, Inc.
- Volkerink, BjÃ¸rn & Haan, Jacob de, 2000. "Fragmented government effects on fiscal policy: new evidence," CCSO Working Papers 200006, University of Groningen, CCSO Centre for Economic Research.
- Alesina, Alberto Francesco & Perotti, Roberto & Tavares, Jose, 1998. "The Political Economy of Fiscal Adjustments," Scholarly Articles 12553724, Harvard University Department of Economics.
- Rodrik, Dani, 1993. "The Positive Economics of Policy Reform," American Economic Review, American Economic Association, vol. 83(2), pages 356-61, May.
- repec:dgr:rugccs:200006 is not listed on IDEAS
- Dan A. Fuller & Richard M. Alston & Michael B. Vaughan, 1995. "The Split between Political Parties on Economic Issues: A Survey of Republicans, Democrats, and Economists," Eastern Economic Journal, Eastern Economic Association, vol. 21(2), pages 227-238, Spring.
- Alberto Alesina & Roberto Perotti & José Tavares, 1998. "The Political Economy of Fiscal Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 197-266.
When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:88:y:2004:i:12:p:2447-2468. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.