It's Politics, Stupid! Political Constraints Determine Governments’ Reactions to the Great Recession
KOF Working Papers No. 365
34 Pages Posted: 14 Aug 2014
Date Written: August 13, 2014
Relying on a large sample of countries, this paper quantifies the effect of political constraints, as measured by legislative control by the incumbent government, on the size of fiscal stimulus packages that have been put in place as reaction to the Great Recession. The results suggest that on average, political constraints reduced the size of a country's fiscal stimulus packages by between 1.2 and 2.8 percentage points of GDP (depending on the stimulus measure used). This substantial effect is significant and robust to a number of alternative dependent variables and specifications. The results are thus in line with the widely held, but never tested, perception that political reality limits the de facto application of discretionary fiscal policy as reaction to negative economic shocks.
Keywords: legislative control, fiscal stimulus, Great Recession
JEL Classification: E02, E32, E62, E65, H12, P48
Suggested Citation: Suggested Citation