Revisiting the political economy of fiscal adjustments

Abstract

We revisit the political economy of fiscal adjustments within the framework of Alesina, Perotti and Tavares (1998), using a panel that spans from 1970 to 2016 for three different datasets (OECD-19, European Union and Eurozone). Employing both descriptive statistics and regression analysis we support the evidence in existing literature. The success of policies that consolidate the budget are assessed. Panel logit and heteroskedasticity probit evaluate the probability of government’s survival after having engaged in tight (loose) fiscal policies. Various economic variables and characteristics of the cabinets are taken into account. The dependent variable used is changes of prime minister or/and change in the ideology of the cabinet. Empirical results suggest that the fiscal variable is insignificant predictor of mentioned changes while other economic variables and adjustment composition dummies are significant predictors.