It's Politics, Stupid! Political Constraints Determined Governments' Reactions to the Great Recession
Published online on October 25, 2016
Abstract
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.