Fractionalization Effect and Government Financing

International Journal of Applied Economics, Vol.2, No.1, pp. 37-49

Posted: 31 Jul 2018

See all articles by Hakan Berument

Hakan Berument

Bilkent University - Department of Economics

Jac C. Heckelman

Wake Forest University - Department of Economics

Date Written: March 2005

Abstract

The weak government argument claims that fractionalized governments (coalition or minority governments) have more difficulty increasing their tax revenues or decreasing their spending than majority governments. This implies that weaker governments are associated with higher government deficits. In this paper, we test the implication of a fractionalization effect within the optimum financing model that suggests governments raise both their tax and seigniorage revenues to finance additional spending. We test the hypothesis for a sample of ten OECD countries for the period 1975-1997 and extend the period for the non-EU nations in the sample to cover 1975-2003. The empirical evidence presented here supports a positive relationship between the degree of fractionalization and seigniorage revenue. Our results also suggest that creation of seigniorage revenue is lower under right-wing governments and an independent central bank.

Keywords: Fractionalization Effect, Optimum Government Financing, Central Bank Independence, Political Orientation

JEL Classification: E62, E50, H21

Suggested Citation

Berument, Hakan and Heckelman, Jac C., Fractionalization Effect and Government Financing (March 2005). International Journal of Applied Economics, Vol.2, No.1, pp. 37-49, Available at SSRN: https://ssrn.com/abstract=3210824

Hakan Berument (Contact Author)

Bilkent University - Department of Economics ( email )

06533 Ankara
Turkey

Jac C. Heckelman

Wake Forest University - Department of Economics ( email )

P.O. Box 7505
Winston-Salem, NC 27109
United States
(336) 758-5923 (Phone)
(336) 758-6028 (Fax)

HOME PAGE: http://www.wfu.edu/~heckeljc/jac.htm

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