Veto players, market discipline, and structural fiscal consolidations Markus Leibrecht, Johann Scharler
By: Leibrecht, Markus
.
Contributor(s): Scharler, Johann.
Material type: 
ArticlePublisher: 2021Subject(s): POLITICA FISCAL | CONSOLIDACION
In:
Public Choice v. 188, n. 3-4, September 2021, p. 361-384Summary: Based on a sample of 16 Western OECD countries we show that although veto players with heterogeneous political preferences reduce the probability of a structural fiscal consolidation, the effect of veto players declines with greater financial market pressure, which we measure as the spread between the long-term government bond yield and the corresponding yield in a base country (either the United States or Germany). We proxy veto players with heterogeneous political preferences primarily by the political constraints index of Henisz (Econ Polit 12(1):1–31, 2000). Our findings support the view that, as long as government bond yield spreads are sufficiently narrow, financial market pressure exerts a disciplining effect on fiscal policy by counteracting the political deadlock resulting from veto players who obstruct structural fiscal consolidations. The mirror image of our finding is that financial market pressure exerts a more positive impact on the likelihood of a structural fiscal consolidation in political environments characterized by many heterogeneous veto players.
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| OP 1443/2021/188/1/2 Public Choice | OP 1443/2021/188/1/2-1 Do fiscal rules constrain political budget cycles? | OP 1443/2021/188/1/2-2 Public expenditures and the risk of social dominance | OP 1443/2021/188/3/4-1 Veto players, market discipline, and structural fiscal consolidations | OP 1443/2021/189/1/2 Public Choice | OP 1443/2021/189/3/4 Public Choice | OP 1443/2021/189/3/4-1 State fiscal constraint and local overrides |
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Based on a sample of 16 Western OECD countries we show that although veto players with heterogeneous political preferences reduce the probability of a structural fiscal consolidation, the effect of veto players declines with greater financial market pressure, which we measure as the spread between the long-term government bond yield and the corresponding yield in a base country (either the United States or Germany). We proxy veto players with heterogeneous political preferences primarily by the political constraints index of Henisz (Econ Polit 12(1):1–31, 2000). Our findings support the view that, as long as government bond yield spreads are sufficiently narrow, financial market pressure exerts a disciplining effect on fiscal policy by counteracting the political deadlock resulting from veto players who obstruct structural fiscal consolidations. The mirror image of our finding is that financial market pressure exerts a more positive impact on the likelihood of a structural fiscal consolidation in political environments characterized by many heterogeneous veto players.
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