Fiscal discipline and exchange rates: Does politics matter?. (9th August 2020)

• Record Type: Journal Article
• Authors: Jalles, Joao Tovar; Mulas‐Granados, Carlos; Tavares, José
• Is Part Of: Scottish journal of political economy. Volume 68:Number 2(2021)
• Page Start: 155
• Page End: 178
• Publication Date: 2020-08-09
• Subjects: deficit -- exchange rates -- political economy -- fiscal discipline; Great Britain -- Economic conditions -- 1945-1964 -- Periodicals; Great Britain -- Economic conditions -- 1964-1979 -- Periodicals; Great Britain -- Economic conditions -- 1979-1997 -- Periodicals; 330.9411005
• DOI: 10.1111/sjpe.12262
• Languages: English
• ISSNs: 0036-9292

Abstract

Abstract: We look at the effect of exchange rate regimes on fiscal discipline, taking into account the effect of underlying political conditions. We present a model where strong politics (defined as policymakers facing longer political horizon and higher cohesion ) are associated with better fiscal performance, but fixed exchange rates may revert this result and lead to less fiscal discipline. We confirm these hypotheses through regression analysis performed on a panel sample covering 79 countries from 1975 to 2012. Our empirical results also show that the positive effect of strong politics on fiscal discipline is not enough to counter the negative impact of being at/moving to fixed exchange rates. Our results are robust to a number of sensitivity checks, including the use of different estimators, alternative proxies for fiscal discipline and sub‐sample analysis.