Do political variables affect fiscal policy adjustment decisions? New empirical evidence

We test eight hypotheses on political factors influencing the likelihood that a fiscal policy adjustment occurs. We employ a panel discrete choice model for 20 OECD countries for the period 1970–2003. Two different definitions of fiscal adjustments are used to capture the differences between rapid and gradual adjustments. We find that these types of fiscal adjustment are primarily driven by economic factors and are hardly affected by political variables. The likelihood that a rapid adjustment takes place is only influenced by upcoming elections, while the likelihood that a gradual adjustment takes place increases in case of broad policy reform.