Fiscal Discipline and Exchange Rates: Does Politics Matter?

Joao Jalles, Carlos Mulas-Granados and José Tavares

No 2019/0103, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

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 important sensitivity checks, including different estimators, alternative proxies for fiscal discipline, and sub-sample analysis.

Keywords: Fiscal discipline; Deficit; Political Economy; Exchange Rates (search for similar items in EconPapers)
JEL-codes: H11 H62 H63 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-opm and nep-pol
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Fiscal discipline and exchange rates: Does politics matter? (2021)
Working Paper: Fiscal Discipline and Exchange Rates: Does Politics Matter? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp01032019

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