Variations in government spending across time and countries: evidence and theory

Abstract

This dissertation examines the sources of government spending variations across time and countries. Overall, both theory and evidence indicate that government spending variations originate not only from economic forces, such as the state of the business cycle and inherited financial fragility, but are ultimately linked to a country’s domestic political environment.

In Chapter 2, I provide empirical evidence on the political determinants of government spending using a panel structural VAR. I use the full sample of OECD countries since 1990 and exploit time-varying ideological party positions. I find that government spending appears to be the key channel through which government ideology affects economic growth. In particular, left-wing governments tend to increase government spending growth after being elected leading to a temporary increase in economic growth.

In Chapter 3, I introduce a theoretical framework that is consistent with the empirical evidence that decisions towards government spending vary according to the ideology of the ruling party on a left-right spectrum. I incorporate heterogenous voters, parties, and repeated elections into a traditional one-sector neoclassical model and calibrate the model for twelve advanced economies since 1950. The model predicts that a large fraction of the time series variations in government spending can be linked to the domestic political environment for most countries (54% on average) and especially in countries with more political polarization and higher persistence in government ideology, as in the United States, the United Kingdom, and Germany.

Chapter 4 presents an empirical case study of an additional, potentially important source of government spending variations. I show that the lack of independent monetary policy may constrain Eurozone countries with a fragile financial position to implement austerity measures in the face of economic downturns such as the ones experienced since the financial crisis and subsequent European debt crisis.