It's Politics, Stupid! Political Constraints Determine Governments’ Reactions to the Great Recession

KOF Working Papers No. 365

34 Pages Posted: 14 Aug 2014

See all articles by Fabian Gunzinger

Fabian Gunzinger

Swiss National Bank

Jan-Egbert Sturm

KOF Swiss Economic Institute, ETH Zurich; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 13, 2014

Abstract

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

Gunzinger, Fabian and Sturm, Jan-Egbert, It's Politics, Stupid! Political Constraints Determine Governments’ Reactions to the Great Recession (August 13, 2014). KOF Working Papers No. 365. Available at SSRN: https://ssrn.com/abstract=2479791 or http://dx.doi.org/10.2139/ssrn.2479791

Fabian Gunzinger

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

Jan-Egbert Sturm (Contact Author)

KOF Swiss Economic Institute, ETH Zurich ( email )

Zurich
Switzerland

HOME PAGE: http://www.kof.ethz.ch

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, 81679
Germany

HOME PAGE: http://www.cesifo.de

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