Democracy and fiscal-policy response to COVID-19

Abstract

In this paper, we investigate the relationship between the level of democracy and fiscal-policy response to the economic crisis induced by the COVID-19 pandemic. We use a novel cross-country panel dataset of fiscal-policy responses with time variation. Our results suggest that more democratic countries adopted substantially larger fiscal-policy packages (in % GDP), and the gap regarding the size of packages between more democratic and less democratic countries widened over time. Our analysis of the components of fiscal policy shows that democracies, in particular, provide larger packages that benefit the broad public. Furthermore, our system-equations estimations suggest that the relation of democracy level with the fiscal-policy response is established through democracy’s relation with inclusive institutions, represented by the parliamentary system, and corruption.