Fiscal transparency, political parties, and debt in OECD countries

TY - JOUR

T1 - Fiscal transparency, political parties, and debt in OECD countries

AU - Alt, James E.

AU - Lassen, David Dreyer

N1 - JEL Classification: D72, E62, H63

PY - 2006

Y1 - 2006

N2 - Many believe and argue that fiscal, or budgetary, transparency has large, positive effects on fiscal performance. However, the evidence linking transparency and fiscal policy outcomes is less compelling. To analyze the effects of fiscal transparency on public debt accumulation, we present a career-concerns model with political parties. This allows us to integrate as implications of a single model three hitherto-separate results in the literature on deficit and debt accumulation: that transparency decreases debt accumulation (at least by reducing an electoral cycle in deficits), that right-wing governments (at least for strategic reasons) tend to have higher deficits than left-wing governments, and that increasing political polarization increases debt accumulation. To test the predictions of the model, we construct a replicable index of fiscal transparency on 19-country OECD data. Simultaneous estimates of debt and transparency strongly confirm that a higher degree of fiscal transparency is associated with lower public debt and deficits, independent of controls for explanatory variables from other approaches

AB - Many believe and argue that fiscal, or budgetary, transparency has large, positive effects on fiscal performance. However, the evidence linking transparency and fiscal policy outcomes is less compelling. To analyze the effects of fiscal transparency on public debt accumulation, we present a career-concerns model with political parties. This allows us to integrate as implications of a single model three hitherto-separate results in the literature on deficit and debt accumulation: that transparency decreases debt accumulation (at least by reducing an electoral cycle in deficits), that right-wing governments (at least for strategic reasons) tend to have higher deficits than left-wing governments, and that increasing political polarization increases debt accumulation. To test the predictions of the model, we construct a replicable index of fiscal transparency on 19-country OECD data. Simultaneous estimates of debt and transparency strongly confirm that a higher degree of fiscal transparency is associated with lower public debt and deficits, independent of controls for explanatory variables from other approaches

KW - Faculty of Social Sciences

KW - fiscal transparency

KW - budgetary institutions

KW - government debt

KW - government deficits

KW - fiscal policy

U2 - 10.1016/j.euroecorev.2005.04.001

DO - 10.1016/j.euroecorev.2005.04.001

M3 - Journal article

SN - 0014-2921

VL - 50

SP - 1403

EP - 1439

JO - European Economic Review

JF - European Economic Review

IS - 6

ER -