Engineering Good Times: Fiscal Manipulation in a Global Economy Angela O’Mahony University of British Columbia Political Science.

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Presentation transcript:

Engineering Good Times: Fiscal Manipulation in a Global Economy Angela O’Mahony University of British Columbia Political Science

Motivation Gov’ts more likely to be reelected in good times. Will gov’ts engage in pre-electoral fiscal manipulation to engineer good times? Gov’t’s decision to manipulate fiscal policy prior to an election is mediated by its international monetary and trade ties

Likelihood of pre-electoral fiscal manipulation Clark & Hallerberg Exchange Rate Trade Openness Low High Flexible Low High Fixed High Low

Likelihood of pre-electoral fiscal manipulation Clark & Hallerberg Exchange Rate Based on Mundell-Fleming: Flexible Low Perfect capital mobility Constant prices Fixed High

Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLow  G desire for fiscal manipulation FixedHighLow

Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLow  International shocks  G desire for fiscal manipulation FixedHigh

Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLow  International shocks  G desire for fiscal manipulation FixedHigh

Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High  Flexibility   Effectiveness of fiscal manipulation LowHigh Low

Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High  Flexibility   Effectiveness of fiscal manipulation LowHigh Low

Likelihood of pre-electoral fiscal manipulation Exchange Rate When exchange rate is flexible, fiscal manipulation only when benefit is high  Flexibility   Effectiveness of fiscal manipulation Benefit increases in trade openness

Likelihood of pre-electoral fiscal manipulation Exchange Rate When exchange rate is flexible, fiscal manipulation only when benefit is high  Benefit as  trade openness  Flexibility   Effectiveness of fiscal manipulation

Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLowHigh FixedHighLow

Likelihood of pre-electoral fiscal manipulation Exchange Rate When the exchange rate is fixed, fiscal manipulation leads to an appreciation of the real exchange rate Real exchange rate appreciation erodes international competitiveness

Likelihood of pre-electoral fiscal manipulation Exchange Rate When the exchange rate is fixed, fiscal manipulation leads to an appreciation of the real exchange rate Real exchange rate appreciation erodes international competitiveness

Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLowHigh FixedHighLow

Likelihood of pre-electoral fiscal manipulation My Argument Exchange Rate Trade Openness Low High FlexibleLowHigh FixedHighLow

Sample: 20 OECD countries, (437 obs) DV:  in gross gov’t debt as a % of GDP Elections Under Fixed Exchange Rate (+) 5.46 (2.26) ** Elections Under Fixed ER x Trade Openness (-) (2.95) * Elections Under Intermediate Exchange Rate 0.47 (2.76) Elections Under Intermediate ER x Trade Openness 0.96 (4.85) Elections Under Flexible Exchange Rate (-) (2.13) * Elections Under Flexible ER x Trade Openness (+) 6.94 (3.57) *

Sample: 20 OECD countries, (437 obs) DV:  in gross gov’t debt as a % of GDP Elections Under Fixed Exchange Rate (+) 5.46 (2.26) ** Elections Under Fixed ER x Trade Openness (-) (2.95) * Elections Under Intermediate Exchange Rate 0.47 (2.76) Elections Under Intermediate ER x Trade Openness 0.96 (4.85) Elections Under Flexible Exchange Rate (-) (2.13) * Elections Under Flexible ER x Trade Openness (+) 6.94 (3.57) *

Sample: 20 OECD countries, (437 obs) DV:  in gross gov’t debt as a % of GDP Elections Under Fixed Exchange Rate (+) 5.46 (2.26) ** Elections Under Fixed ER x Trade Openness (-) (2.95) * Elections Under Intermediate Exchange Rate 0.47 (2.76) Elections Under Intermediate ER x Trade Openness 0.96 (4.85) Elections Under Flexible Exchange Rate (-/=) (2.13) * Elections Under Flexible ER x Trade Openness (+) 6.94 (3.57) *

Sample: 20 OECD countries, (437 obs) DV:  in gross gov’t debt as a % of GDP Elections Under Fixed Exchange Rate (+) 5.46 (2.26) ** Elections Under Fixed ER x Trade Openness (-) (2.95) * Elections Under Intermediate Exchange Rate 0.47 (2.76) Elections Under Intermediate ER x Trade Openness 0.96 (4.85) Elections Under Flexible Exchange Rate (-/=) (2.13) * Elections Under Flexible ER x Trade Openness (+) 6.94 (3.57) *

Pre-electoral fiscal manipulation as trade openness varies

Conclusion Mundell-Fleming framework Substantive importance: EMU International ties matter