FISCAL POLICY, PUBLIC DEBT STABILIZATION AND POLITICS: THEORY AND EVIDENCE FROM THE US AND UK

Paper number: 94/01

Paper date: March 1994

Year: 1994

Paper Category: Discussion Paper

Authors

Ben Lockwood
University of Exeter and CEPR

Apostolis Philippopoulos
University of Essex

Andy Snell
University of Edinburgh

Abstract

This paper presents a two-party model of fiscal and debt policy which; (i) explicitly models the partisan, stabilisation, and (to some extent) survival motives of politicians; (ii) has predictions that are largely consistent with existing empirical findings about partisan and electoral effects in government expenditure, tax revenue, and debt; (iii) yields new predictions about how the feedback of fiscal policy on lagged debt may depend on partisan and electoral effects. These new predictions are not rejected by a test of the model on US and UK data.

October 1992
Revised March 1994

JEL Classification numbers: E30, E62, E63.
Keywords: Political business cycles, stabilization, fiscal policy, public debt.

We would like to thank G.Alogoskoufis, M.Chambers, T.Kollintzas and J.Richmond for helpful comments. We have also benefitted from the comments of seminar participants at Tilburg, IRES in Louvain-La-Neuve,.3 CPER in Athens and the European Economic Society Conference in Uppsala.