The Political Economy of Fiscal Prudence in Historical Perspective

Abstract

This paper uses a new panel data set to perform a statistical analysis of political regimes and financial rectitude over the long run. Old Regime polities in Europe typically suffered from fiscal fragmentation and absolutist rule. By the start of World War I, however, many such countries had centralized institutions and limited government. Panel regressions indicate that political transformations towards centralized and limited regimes led to significant improvements in fiscal prudence. Dynamic estimations and structural breaks tests reinforce these findings. The results suggest that good financial housekeeping is one mechanism through which political reforms reduce sovereign credit risk.

JEL Classification: O16, P16, N23