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The Stability and Growth Pact: A European Answer to the Political Budget Cycle?

  • Thierry Warin

    ()

  • Kenneth Donahue

The existing literature on political budget cycles looks at the temptation for incumbent governments to run a greater deficit before an election by considering the characteristics of the incumbent. We propose here to look at the signals the incumbent receives from the voters. For this purpose, we consider the votes from the previous national elections and see whether they may influence the incumbent government to run a sound fiscal policy or an expansionary fiscal policy. However, since 1993 Europe has been equipped with two fiscal rules: a deficit and a debt ceiling. In this context, can we find evidence of a “political budget cycle” before 1993, and did the fiscal rules prevent the existence of a “political budget cycle” afterwards? To address these questions, we use a cross-sectional time series analysis of European countries from 1979 to 2005.

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File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0606.pdf
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Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0606.

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Length: 24 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:mdl:mdlpap:0606
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  1. Persson, Torsten & Tabellini , Guido, 1997. "Political Economics and Macroeconomic Policy," Seminar Papers 630, Stockholm University, Institute for International Economic Studies.
  2. Joao L.M. Amador, 2000. "Fiscal Policy And Budget Deficit Stability In A Continuous Time Stochastic Economy," Computing in Economics and Finance 2000 27, Society for Computational Economics.
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  7. Mark Mink & Jakob de Haan, 2005. "Has the Stability and Growth Pact Impeded Political Budget Cycles in the European Union?," CESifo Working Paper Series 1532, CESifo Group Munich.
  8. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
  9. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  10. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August.
  11. Thierry Warin & Lindsay Wolff, 2005. "EuropeÕs Deficit Free Riders: A Panel Data Analysis," European Political Economy Review, European Political Economy Infrastructure Consortium, vol. 3(Spring), pages 5-17.
  12. Bohn, H., 1990. "The Sutainability Of Budget Deficits In A Stochastic Economy," Weiss Center Working Papers 6-90, Wharton School - Weiss Center for International Financial Research.
  13. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  14. Francesco P. Mongelli, 1996. "The Effects of the European Economic and Monetary Union (EMU)on National Fiscal Sustainability," IMF Working Papers 96/72, International Monetary Fund.
  15. Marco Buti & Paul van den Noord, 2003. "Discretionary Fiscal Policy and Elections: The Experience of the Early Years of EMU," OECD Economics Department Working Papers 351, OECD Publishing.
  16. Turnovsky, Stephen J, 1996. "Fiscal Policy, Adjustment Costs, and Endogenous Growth," Oxford Economic Papers, Oxford University Press, vol. 48(3), pages 361-81, July.
  17. Bernheim, B Douglas, 1989. "A Neoclassical Perspective on Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 55-72, Spring.
  18. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  19. Shi, Min & Svensson, Jakob, 2002. "Conditional Political Budget Cycles," CEPR Discussion Papers 3352, C.E.P.R. Discussion Papers.
  20. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
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