Fiscal Transparency, Political Parties, and Debt in OECD Countries

Economic Policy Research Unit Working Paper No. 03-02

47 Pages Posted: 4 Mar 2003

See all articles by David Dreyer Lassen

David Dreyer Lassen

University of Copenhagen - Department of Economics

James E. Alt

Harvard University - Department of Government

Date Written: November 5, 2003

Abstract

Many believe and argue that fiscal, or budgetary, transparency has large, positive effects on fiscal performance. However, the evidence linking transparency and fiscal policy outcomes is less compelling. To analyze the effects of fiscal transparency on public debt accumulation, we present a career-concerns model with political parties. This allows us to integrate as implications of a single model three hitherto-separate results in the literature on deficit and debt accumulation: that transparency decreases debt accumulation (at least by reducing an electoral cycle in deficits), that right-wing governments (at least for strategic reasons) tend to have higher deficits than left-wing governments, and that increasing political polarization increases debt accumulation. To test the predictions of the model, we construct a replicable index of fiscal transparency on 19-country OECD data. Simultaneous estimates of debt and transparency strongly confirm that a higher degree of fiscal transparency is associated with lower public debt and deficits, independent of controls for explanatory variables from other approaches.

Keywords: fiscal transparency, budgetary institutions, public debt

JEL Classification: D7, E6, H6

Suggested Citation

Lassen, David Dreyer and Alt, James E., Fiscal Transparency, Political Parties, and Debt in OECD Countries (November 5, 2003). Economic Policy Research Unit Working Paper No. 03-02, Available at SSRN: https://ssrn.com/abstract=380200 or http://dx.doi.org/10.2139/ssrn.380200

David Dreyer Lassen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Studiestraede 6
DK 1455 Copenhagen
Denmark
+45 3532 4412 (Phone)
+45 3532 4444 (Fax)

James E. Alt

Harvard University - Department of Government ( email )

1737 Cambridge Street
Cambridge, MA 02138
United States