Trust in Government and Fiscal Adjustments

23 Pages Posted: 10 Jul 2013

See all articles by Dirk Bursian

Dirk Bursian

Deutsche Bundesbank

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy; Vienna University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Jochen Zimmer

Goethe University Frankfurt - Faculty of Economics and Business Administration; Deutsche Bundesbank

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Date Written: June 30, 2013

Abstract

The paper looks at the determinants of fiscal adjustments as reflected in the primary surplus of countries. Our conjecture is that governments will usually find it more attractive to pursue fiscal adjustments in a situation of relatively high growth, but based on a simple stylized model of government behavior the expectation is that mainly high trust governments will be in a position to defer consolidation to years with higher growth. Overall, our analysis of a panel of European countries provides support for this expectation. The difference in fiscal policies depending on government trust levels may help explaining why better governed countries have been found to have less severe business cycles. It suggests that trust and credibility play an important role not only in monetary policy, but also in fiscal policy.

Keywords: trust, debt sustainability, fiscal reaction function, euro area, EU

JEL Classification: H620, E620

Suggested Citation

Bursian, Dirk and Weichenrieder, Alfons J. and Zimmer, Jochen, Trust in Government and Fiscal Adjustments (June 30, 2013). CESifo Working Paper Series No. 4310, Available at SSRN: https://ssrn.com/abstract=2291896

Dirk Bursian

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Alfons J. Weichenrieder (Contact Author)

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy ( email )

United States

HOME PAGE: http://www.uni-frankfurt.de/fb02/weichenrieder/

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Jochen Zimmer

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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