Political Implications of Fiscal Performance in OECD Countries

Fiscal Indicators, Banca D'Italia, pp. 957-982

26 Pages Posted: 15 Aug 2009

See all articles by Adi Brender

Adi Brender

Bank of Israel - Research Department

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

Abstract

While economists argue that lower budget deficits are required in the developed countries, there is a widely held perception that expansionary fiscal policy helps incumbents to get reelected, an assumption that undelies the view that political budget cycles are widespread. However, this view has not been subject to much empirical testing. We examine this argument in a sample of developed countries over the period 1960-2003 and find that increased deficits during an incumbent's term in office, especially in election years, reduce the probability that a leader is reelected. The effects we find are not only statistically significant but also quite substantial quantitatively. We also find that voters do not have a systematic preference for expenditure cuts relative to tax hikes or vice versa.

Keywords: Political budget cycle, polical business cycle, fiscal manipulation

JEL Classification: D72, E62, H62

Suggested Citation

Brender, Adi and Drazen, Allan, Political Implications of Fiscal Performance in OECD Countries (March 2007). Fiscal Indicators, Banca D'Italia, pp. 957-982. Available at SSRN: https://ssrn.com/abstract=1448604 or http://dx.doi.org/10.2139/ssrn.1448604

Adi Brender (Contact Author)

Bank of Israel - Research Department ( email )

PO Box 780
Jerusalem 91007
Israel
+972 2 655 2618 (Phone)
+972 2 655 2657 (Fax)

Allan Drazen

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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