Regulation and Government Debt

48 Pages Posted: 1 Nov 2018

See all articles by Niclas Berggren

Niclas Berggren

Research Institute of Industrial Economics (IFN); University of Economics, Prague - Faculty of Economics and Public Administration

Christian Bjørnskov

Aarhus University - Department of Economics and Business; Research Institute of Industrial Economics (IFN); Center for Political Studies; Institute for Corruption Studies

Date Written: October 10, 2018

Abstract

Government debt is high in most developed countries, and while it may reflect short-term attempts to kick-start the economy in times of crisis through fiscal stimulus, the longer-term consequences risk being detrimental to investment and growth. This makes it important to identify factors that are associated with debt. While previous studies have related government debt to economic and political variables, they have not incorporated the degree to which the economy is regulated. Using regulatory freedom (absence of detailed regulation of labor, business and credit) from the Economic Freedom of the World index, we conduct an empirical analysis covering up to 67 countries in the period 1975–2010. The main finding is that regulatory freedom, especially for credit, affects debt development negatively. The effect is more pronounced when the political system is fractionalized and characterized by strong veto institutions, indicating policy stability and credibility, and when governments have a right-wing ideology.

Keywords: Debt, Economic freedom, Regulation, Markets, Stimulus, Keynesianism

JEL Classification: E02, H63

Suggested Citation

Berggren, Niclas and Bjørnskov, Christian, Regulation and Government Debt (October 10, 2018). IFN Working Paper No. 1239, Available at SSRN: https://ssrn.com/abstract=3264022

Niclas Berggren (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
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Sweden

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University of Economics, Prague - Faculty of Economics and Public Administration ( email )

nám. W. Churchilla 4
Praha, 130 67
Czech Republic

Christian Bjørnskov

Aarhus University - Department of Economics and Business ( email )

Fuglesangs Allé 4
Aarhus V, DK-8210
Denmark

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Center for Political Studies

Landgreven 3
Copenhagen K, DK-1301
Denmark

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

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