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An Empirical Investigation of the Strategic Use of Debt

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  • Per Pettersson

    (Stockholm University)

Abstract

In this paper I test whether there are strategic considerations in the making of fiscal policy. The general idea is that if a government anticipates the possibility of defeat in the next election it will try to use the debt strategically in order to influence the policy of its successor. Previous empirical studies have either rejected the strategic explanation of debt or have not been able to isolate this effect. I argue that these findings might be due to potential difficulties with the data sets used. To come to grips with these problems I make use of a data set from Swedish local governments. The main advantages of this panel data set are the institutional and constitutional homogeneity of the sample and the large number of observations from elections, nearly 2000. The main findings of this paper strongly suggest that there are strategic considerations in the making of fiscal policy. A right-wing government accumulates more debt during its term of office if it thinks that it will be defeated as compared to when it expects to remain in office. On the other hand, a left-wing government decreases the level of debt the higher the possibility of its defeat. Moreover, the larger the inherited debt the more a newly elected government has to reduce spending. These results are consistent with the predictions from a model developed by Persson and Svensson (1989).

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  • Per Pettersson, 2000. "An Empirical Investigation of the Strategic Use of Debt," Econometric Society World Congress 2000 Contributed Papers 1372, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1372
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    2. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier.
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    4. Luisa Lambertini, 2003. "Are Budget Deficits Used Strategically?," Boston College Working Papers in Economics 578, Boston College Department of Economics.
    5. 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.
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    10. Alberto Alesina & Guido Tabellini, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 403-414.
    11. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
    12. Alberto Alesina & Nouriel Roubini & Gerald D. Cohen, 1997. "Political Cycles and the Macroeconomy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510944, January.
    13. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
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