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Fractionalization Effect and Government Financing

Author

Listed:
  • Hakan Berument
  • Jac C. Heckelman

    (Bilkent University and Wake Forest University)

Abstract

The weak government argument claims that fractionalized governments (coalition or minority governments) have more difficulty increasing their tax revenues or decreasing their spending than majority governments. This implies that weaker governments are associated with higher government deficits. In this paper, we test the implication of a fractionalization effect within the optimum financing model that suggests governments raise both their tax and seigniorage revenues to finance additional spending. We test the hypothesis for a sample of ten OECD countries for the period 1975-1997 and extend the period for the non-EU nations in the sample to cover 1975-2003. The empirical evidence presented here supports a positive relationship between the degree of fractionalization and seigniorage revenue. Our results also suggest that creation of seigniorage revenue is lower under right-wing governments and an independent central bank.

Suggested Citation

  • Hakan Berument & Jac C. Heckelman, 2005. "Fractionalization Effect and Government Financing," The International Journal of Applied Economics, Department of General Business, Southeastern Louisiana University, vol. 2(1), pages 37-49, March.
    • Handle: RePEc:ija:ancoec:v:2:y:2005:i:1:p:37-49
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    File URL: http://www2.selu.edu/orgs/ijae/Journal%202/IJAE%20MARCH%202005%20BERUMENT%20Fractionalization%2003%2005%202005%20FINAL1211.pdf
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    More about this item

    Keywords

    Fractionalization effect; optimum government financing; central bank independence; political orientation;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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