Fiscal rules,fiscal outcomes and financial market behaviour

Since the outbreak of the eurozone's sovereign debt crisis, a range of fiscal policy measures have been adopted at the European Union (EU) and national levels that have given rise to claims of a significant reinforcement of fiscal policy constraint. Given the prominence and reinvigorated political appeal of fiscal rules in the EU and beyond, it is disconcerting how little we actually know about the link between fiscal rules, budgetary outcomes and market behaviour. In this research note, the aim is to take stock of the existing literature and challenge its contribution to the current policy debate on the merits of fiscal rules. Specifically it will focus on problems linked to endogeneity, measurements and contextuality.     

The Congress and fiscal policy

Although the common belief is that the Congress has paid little attention to fiscal policy, the same kinds of political-economic models which have been used to explain presidential budgetary policy may be used equally well to explain congressional budgetary behavior. The Congress' fiscal policy appears to be systematically sensitive to both economic and political factors. Changes in the unemployment rate have a major impact on congressional budgetary policy. As for political factors, the President's lead is followed most closely on revenue proposals and not at all on the expenditure side. The electoral cycle, in particular the off-year congressional election year, is also important; inducing larger deficits and smaller increases in revenues. When the influences on congressional fiscal behavior are compared with those on presidential behavior, the sources of the generally more expansionary congressional fiscal policy are identified. Congressional budget deficits increase in response to increased rates of unemployment but are insensitive to increases in inflation. In contrast, presidential budgets are heavily influenced by inflation and the growth in personal income — increases in each resulting in smaller proposed deficits — as well as by unemployment rates. In years in which both unemployment and inflation are increasing, the combination of the two (assuming a one percentage point change in each) implies an increase in the congressional deficit of $6.7 billion but a decrease in the president's proposed deficit of $2.5 billion. The implications of this study are a challenge to the literature which makes the President the central actor in macro-economic policy.     

Fiscal policy responsiveness, persistence, and discretion

This paper analyzes the different characteristics of fiscal policy using a two-step estimation procedure. First, we decompose both government spending and government revenue into three components: responsiveness, persistence and discretion. Second, we assess the determinants of these characteristics. Using data from 132 countries, our results show that fiscal policy is more persistent than responsive to economic conditions, which implies that the authorities may have less leeway in the short-run notably to curb spending behavior. In addition, countries characterized by greater fiscal persistence have less discretion and responsiveness. Finally, macroeconomic, institutional and geographic variables explain cross-country variation in fiscal characteristics.     

Fiscal restraint and the political economy of EMU

While the principle of delegation has become well established on the national level for monetary policy, fiscal policies remain in the hands of policy makers depending on rent-seeking interest groups. We argue that the Maastricht Treaty provides a unique international commitment that enables governments to follow restrictive fiscal policies by attributing their negative side-effects to Europe, and to implement austerity measures despite rising unemployment or a decline in growth. Hence, the popularity of the European idea is instrumented to enforce fiscal discipline. The paper outlines the political economy framework and presents new econometric evidence.     

Political institutions and sovereign borrowing: evidence from nineteenth-century Argentina

I study the relationship between political institutions and sovereign borrowing when constitutional constraints are systematically chosen to obtain better credit conditions. I argue that the impact of institutional constraints on country risk premia depends on the government’s concern with the country’s creditworthiness and its “willingness to repay”; two variables that are hardly observable. To properly evaluate the relationship between political institutions and sovereign borrowing, I focus on the link between institutional constraints and the risk premia of Argentine bonds between 1822 and 1913. Specifically, I analyze whether a “structural break” in the government’s cost of borrowing time-series exists. I use the Perron-Volesang test for structural change with unknown break dates. The statistical analysis indicates that the adoption of institutional constraints led to significant improvements in borrowing terms: the series has a single structural change; and the distinctive break point is associated with the country’s adoption of constitutional checks and balances. Time-series regressions and instrumental variables (IV) estimation reinforce these findings.     

Cabinet structure and fiscal policy outcomes

A central explanation of fiscal performance focuses on the structure of the cabinet. However, the partisan context of cabinet decisions remains under‐explored, the findings are based on small samples and the variables of interest are often poorly operationalised. Using a new dataset of spending ministers and partisan fragmentation in the cabinets of 58 countries between 1975 and 1998, this study finds a strong positive association between the number of spending ministers and budget deficits and expenditures, as well as weaker evidence that these effects increase with partisan fragmentation.     

Fiscal policy and reelection in Brazilian municipalities

This paper uses a new panel of more than 2,000 Brazilian municipalities over 13 years to analyze the influence of public expenditures on the probability of mayors’ reelection. We examine Brazilian municipal elections from 1988 to 2000 using a logit fixed-effects model. The results suggest that mayors who spend more during their terms of office increase the probability of their own reelection or of a successor of the same political party. In particular, higher capital spending over the years preceding elections and current expenditures in election years are beneficial to Brazilian incumbent mayors.     

Legislative district configurations and fiscal policy in American States

In accordance with the median voter theorem the median legislator is decisive in representative democracy. If the preferences of the median legislator differ from the preferences of the median voter in the polity, fiscal policy choices will predictably diverge from those favored by the median voter. This paper seeks to identify the median district (and therein the preferences driving the median legislator) in American State legislatures. Using economic characteristics of constituents, we find substantial differences between the median district and the statewide median. As the income of the median district rises above the median income of the polity, government expenditures increase. In addition, the degree to which income is skewed across legislative districts affects spending for redistribution programs. Finally, we find that direct democracy procedures, which allow the statewide median voter to check legislative decisions, limit the impact of differences between the district and polity medians.     

Fiscal Adjustments and Their Effects During the Transition to the EMU

The transition phase to EMU hasbeen accompanied by considerable monetaryand fiscal consolidation efforts in the EU.This paper analyses this consolidationprocess and its effects on economicactivity in the EU. It is tested to what extent fiscal retrenchment efforts havedepressed or stimulated private spending. Inthe case of the latter non-Keynesian effectsdominate the traditional Keynesianexpenditure effects of government spending,taxation and transfer payments.     

Contesting Europeanisation: Agents,institutions and narratives in British monetary policy

This article investigates how Europeanisation can sometimes generate controversy at the domestic level by exploring British policy towards ERM in the 1980s and 1990s. It argues that existing approaches which point to the occurrence of ‘misfit’ between domestic and European institutions/policies only go part of the way to explaining the contentious nature of this process. Europeanisation was disputed in this instance because it produced competing narratives as the question of fit/misfit (as well as adaptational pressure) was discursively constructed in different ways by different groups with different normative positions. The article concludes by briefly considering the implications of this case study for future theories of Europeanisation.     

Political and institutional determinants of fiscal policy in the European Community

In recent theoretical and empirical research the variation in political and institutional arrangements which may affect the process of national policy formation is examined, in order to explain cross-country differences with respect to fiscal policies pursued. In this paper we build upon this literature and examine whether and how cross-country differences in debt accumulation and public sector size of Member Countries of the European Community during the 1980s can be explained. We conclude that the growth of government debt is positively related to the frequency of government changes and negatively to sound budgetary procedures. In countries with left-wing governments the growth of the share of government spending in total output generally tends to be higher.     

The growth effects of fiscal policy in Greece 1960–2000

This empirical paper uses annual data for Greece 1960–2000 to study the link between fiscal policy and economic growth. Our regression analysis implies that, although a smaller public sector can be good for growth, it is necessary to look beyond size; the composition and quality/efficiency of the public sector are equally important. The policy lesson is that a smaller government share in GDP, a reallocation of funds away from the wage bill to public investment, and an improvement in government quality/efficiency can become engines of long-term growth.     

长三角区域地方政府财政政策及其绩效评价

财政政策作为地方政府可以掌控的最直接、最有效的政策手段,其政策设计和实施效果对于实现地方社会经济发展目标有着不可替代的重要作用。就长三角地区地方政府公共财政政策的内容及其实施绩效进行初步的梳理和分析,从财政支出的角度对长三角地区部分公共财政政策的实施进行绩效评价。限于篇幅和容量,将只考察部分省级财政政策及其绩效评价,而对于长三角地区的省级政府以下的市、县、乡(镇)财政政策及其绩效没有考虑。     

Policy persistence,risk estimation and policy underreaction

In recent years, there has been remarkable progress in our understanding of policy persistence, on the one hand, and of the psychological phenomenon of underreaction, on the other. Surprisingly, there has been no attempt to use robust findings, derived from these efforts, in order to understand the nuances of policy underreaction. Policy underreaction refers to systematically slow and/or insufficient response by policymakers to increased risk or opportunity, or no response at all. This article tries to give the concept of policy underreaction a robust analytical identity by integrating cognitive, social, psychological and emotional variables in the explanation of policy underreaction and by introducing a variation across different types of contextual sources of policy persistence as explanatory variables of this phenomenon. It develops an analytical framework that revolves around two key elements of decision making in situations of risk unfolding over time: (1) policymakers’ underestimation and accurate estimation of increased risks and (2) intra- and extra-organizational sources of policy persistence. Based on these dimensions, the article identifies and illustrates four distinct modes of policy underreaction which reflect differences in the nature of implemented policy.     

The politics of fiscal policy during economic downturns, 1981–2010

This article investigates fiscal policy responses to the Great Recession in historical perspective. It explores general trends in the frequency, size and composition of fiscal stimulus as well as the impact of government partisanship on fiscal policy outputs during the four international recessions of 1980–1981, 1990–1991, 2001–2002 and 2008–2009. Encompassing 17–23 Organisation for Economic Cooperation and Development (OECD) countries, the analysis calls into question the idea of a general retreat from fiscal policy activism since the early 1980s. The propensity of governments to respond to economic downturns by engaging in fiscal stimulus has increased over time and no secular trend in the size of stimulus measures is observed. At the same time, OECD governments have relied more on tax cuts to stimulate demand in the two recessions of the 2000s than they did in the early 1980s or early 1990s. Regarding government partisanship, no significant direct partisan effects on either the size or the composition of fiscal stimulus is found for any of the four recession episodes. However, the size of the welfare state conditioned the impact of government partisanship in the two recessions of the 2000s, with left‐leaning governments distinctly more prone to engaging in discretionary fiscal stimulus and/or spending increases in large welfare states, but not in small welfare states.     

Formula budgeting: The economics and analytics of fiscal policy under rules

The dramatic change in aggregate fiscal policy in recent years has contributed to a shift from process rules to allocation rules in federal budgeting. Although the allocation rules inherent in formula budgeting seem to offer fairness in times of fiscal constraint, they actually impose arbitrary program-level budgets that reflect the peculiarities of baselines, accounting conventions, and time horizons. Formula budgeting also changes the analytical environment, forcing policy analysts to pay greater attention to institutional arrangements.     

State institutions, political power and social policy choices: Reconstructing the origins of Nordic models of social policy

Abstract.  The origins of the Nordic social policy model(s) need to be viewed broadly and historically from its late nineteenth-century initiation to the immediate postwar period (1940s to the early 1960s), when a social democratic model began to consolidate. In reference to the alternate social policy traditions of British poor relief and German occupational insurance, this article analyzes the sociopolitical contexts that finally prevented Scandinavian states from developing similarly, instead enabling development of universalistic social policy. The historical narratives are arranged with respect to four analytical aspects: policy development; the configuration of state institutions; the strength of liberal, conservative and leftist power blocs; and intra-Nordic divergence in all these respects. Such an approach integrates state-centred and power-resources-focused analyses of Nordic welfare.