Do Financial Arrangement of the International Monetary Fund Has Impact on the Reduction of Government Spending, Evidence through Political Fiscal Cycles, the Case of Croatia

Ivana Rukavina

doi:10.22158/jepf.v4n2p143

Abstract

<p><em>This paper examines the regulatory role of the IMF on government spending through political fiscal cycles. According to theoretical views, the fiscal policy in the pre-election period reflects an increase in government spending or budget expenditures; in postelection period, it takes a restrictive course by reducing spending. In the presence of a contractual agreement with the IMF, the theory points to limiting and reducing the magnitude of government spending in the pre-election period. According to the research results in Croatia, there is an increase in government spending in the election quarter, and its decrease in the quarter after the election. On the other hand, the contractual arrangements with the IMF show significant reductions in government spending. When a country is under a contractual obligation with the IMF, it reduced the government spending in the pre-election period in relation to the period when it is not under a contractual obligation.</em></p>

Highlights

Fiscal consolidation has become a matter of fist order after the global world crisis in most sovereign and democratic states
The International Monetary Fund (IMF) tends to contribute to the generation of political fiscal cycles”
The research in Croatia was conducted by Vučković (2010) which proves the existence of the political fiscal cycles in budget spending

Summary

Introduction

Fiscal consolidation has become a matter of fist order after the global world crisis in most sovereign and democratic states. The research conducted by the Ebeke i Ölcer (2013) dynamic panel model confirms the political fiscal cycles by increasing government spending and creating a deficit; two years after the elections, highlighting the features of fiscal consolidation by reducing the investment spending and increasing budget revenues; but the undertaken fiscal consolidation is not strong enough to neutralize the pre-election expansion. Funding through the conditionality system encourages the country to adopt a sustainable macroeconomic policy; conditionality constrains public finances, leading to a reduction in the use of fiscal policy for election purposes As it is clear from the analysis, there is no single consensus on the influence of the IMF on the political fiscal cycle, it is justified to notice the position of Vaubel (1991) who statement “IMF lending facilitates the expansion. The parliamentary elections that took place since 1995 are taken into account during the testing

Results

Method and Data

Empirical Results

Conclusion