Abstract
Using annual data for 60 countries over 1980–2014, we study the drivers of fiscal adjustments, expansions, and their duration. In contrast to most previous studies, the identification of these fiscal events relies on breaks in their data generating process. Our findings suggest that a few political and institutional variables play a role in determining the occurrence and the duration of fiscal adjustments and expansions. The results also highlight the importance of analyzing the likelihood of fiscal events together with their persistence. Factors that do not affect the occurrence of fiscal adjustments or expansions may influence their persistence once initiated.
Highlights
The analysis of political-economy factors influencing the occurrence of fiscal policy adjustments and expansions has received considerable attention in the literature since the publication of Alesina and Perotti (1995) seminal paper
Using annual data for 60 countries over 1980–2014, we study the drivers of fiscal adjustments, expansions, and their persistence over time
We identify 62 fiscal adjustments and 60 fiscal expansions
Summary
The analysis of political-economy factors influencing the occurrence of fiscal policy adjustments and expansions has received considerable attention in the literature since the publication of Alesina and Perotti (1995) seminal paper. An additional problem appears when these one-size-fits-all thresholds are combined with ad hoc lengths of time in order to classify fiscal adjustments (as successful or unsuccessful, large or small, and gradual or fast) This has been common practice in the empirical literature and we believe it blurs the occurrence of fiscal adjustments and their persistence over time, making a proper analysis of the drivers of fiscal adjustments and their duration problematic. Our study takes Mierau et al (2007) as a starting point as these authors were the first to systematically examine the drivers of fiscal adjustments for a sample of OECD countries, considering a large set of potential political and economic determinants.
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