International Capital Flows, Housing Prices, and Fiscal Policy Preferences in Central and Eastern Europe

27 Pages Posted: 25 Aug 2014

See all articles by J. Lawrence Broz

J. Lawrence Broz

University of California, San Diego (UCSD) - Department of Political Science

Ben W. Ansell

University of Oxford - Department of Politics and International Relations

Date Written: 2014

Abstract

Global imbalances peaked at more than 6 percent of world GDP in 2006 but subsequently fell to around 3 percent of world GDP by 2011. Housing markets in Eastern Europe suffered the full brunt of this “capital flow cycle”: they experienced real estate bonanzas when capital was flowing in, followed by property busts when capital flows reversed. We examine the impact of this capital flow cycle on fiscal policy preferences in Central and Eastern Europe (CEE). Our argument is that home equity is a form of self-insurance against income loss that can substitute for government-provided social insurance. Therefore, during the ‘bonanza” phase of the cycle, when capital inflows were large and housing prices were rising, we expect CEE voters to respond by demanding both lower taxes and less publicly-provided social insurance. When capital flows reversed and real estate markets went from boom to bust, we expect CEE voters to become more favorable to redistributive taxation and social insurance. We evaluate these claims with evidence from the EBRD’s “Life in Transition” Surveys (LiTS), using the wave administered in late 2006 (LiTS I) to assess fiscal preferences during the bonanza, and the wave conducted in late 2010 (LiTS II) to assess how preferences had changed after the bust. We find consistent evidence that mortgage-holders’ fiscal preferences reversed between 2006 and 2010, shifting from right (opposed to redistribution) to left (in support of redistribution) as capital flows drove housing prices first up and then down.

Keywords: International Capital Flows, Housing Bubbles, Fiscal Policy, Eastern Europe

JEL Classification: P16, P26, E6, N1, N2

Suggested Citation

Broz, J. Lawrence and Ansell, Ben W., International Capital Flows, Housing Prices, and Fiscal Policy Preferences in Central and Eastern Europe (2014). APSA 2014 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2454878

J. Lawrence Broz (Contact Author)

University of California, San Diego (UCSD) - Department of Political Science ( email )

9500 Gilman Drive
Code 0521
La Jolla, CA 92093-0521
United States

HOME PAGE: http://pages.ucsd.edu/~jlbroz/

Ben W. Ansell

University of Oxford - Department of Politics and International Relations ( email )

Manor Road
Oxford, OX1 3UQ
United Kingdom

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