It's Politics, Stupid! Political Constraints Determined Governments' Reactions to the Great Recession

Abstract

Summary This paper quantifies the effect of political constraints, as measured by legislative control by the incumbent government, on the size of fiscal stimulus packages that have been put in place as a reaction to the Great Recession. On average, political constraints reduced the size of a country's fiscal stimulus package by between 1 and 2.7 percentage points of GDP. This finding is robust to a number of alternative dependent variables, control variables, and sample specifications and is in line with the widely held, but never tested, perception that political reality limits the de facto application of discretionary fiscal policy as reaction to economic shocks.

Hit from abroad: Party dominance and the fiscal response to external economic shocks

“…Second, the paper contributes to the literature on the effect of external economic shocks (see Campello & Zucco, 2016) by providing evidence that the effects of external economic shocks extend to subnational governments' fiscal policy decisions. Third, the paper contributes to the literature on the effect of partisanship and economic crises (see Galasso, 2014, andGunzinger &Sturm, 2016) by showing that not only ideology matters, but also the degree of dominance of the political parties. Finally, the paper contributes to the literature on the response of subnational governments to international crises (see Toubeau & Vampa, 2021) by showing that the degree of dominance can affect subnational governments' fiscal policy choices.…”

“…He shows that economic crises foster a liberalization of product markets, but more regulation for financial markets. Finally, Gunzinger and Sturm (2016) analyze how political constraints (operationalized as legislative control) affect the size of the stimulus package implemented in response to the 2008 US financial crisis. The authors find that more political constraints decreased the size of the stimulus packages.…”

Are government expenditures more cyclical the more they finance the provision of public goods?

“…5 A further test of the relevance of government discretion is a test of the extent to which the government has discretion to pursue its own ideology. Turning, specifically, to the possibility that, with greater discretion, further weight might be given to government ideology (Castro & Martins, 2018;Gunzinger & Sturm, 2016;Potrafke, 2011), consider the likely impact on expenditures when government is able to exercise discretion.…”

Political fractionalization and delay in fiscal stabilizations: a duration analysis

“…***, **, and * indicate significance levels of 1, 5, and 10 %, respectively. The Efron (1977) approximation is applied to handle tied failures in the Cox model 14 We also followed Gunzinger and Sturm (2014) to use the all house variable from the DPI2012 as an inverse measure of political constraint. According to the DPI2012, the all house variable is set to one if the party of the executive has absolute majorities in the one or two legislative chambers having lawmaking powers, and zero otherwise.…”