Political fragmentation is regularly considered to be a relevant factor
affecting the outcomes of fiscal policy. It is assumed that a fragmented
fiscal policy process leads to higher expenditures and subsequently in a
higher deficit. But “hard evidence” in support of this hypothesis is rare, and
conclusions can only be drawn very carefully. The present paper gives an
overview of the existing literature on the role of (size) fragmentation and its
effects on fiscal policy outcomes. The main focus is on the work contributed
by Yianos Kontopoulos and Roberto Perotti, who used a panel of 20 OECD
countries over 1960-1995 for their analysis of government fragmentation.
Table of Contents
1 Introduction
2 Research Overview
3 The Kontopoulos/Perotti model
3.1 Data and fragmentation variables
3.2 The modeling framework
4 The Analysis
4.1 Basic results
4.2 Robustness and Sensitivity
5 Concluding comments
Objectives and Topics
This paper examines the hypothesis that political and government fragmentation negatively affects fiscal policy outcomes, specifically leading to higher expenditures and budget deficits. The primary research goal is to provide a critical overview of the existing literature on this topic, with a specific focus on the empirical model and findings developed by Kontopoulos and Perotti regarding executive and legislative fragmentation.
- The impact of political and government fragmentation on fiscal discipline.
- Distinction between legislative fragmentation and executive (cabinet) fragmentation.
- The "common pool" model as a theoretical basis for fiscal profligacy.
- Empirical evidence derived from a panel analysis of 20 OECD countries (1960–1995).
- Sensitivity and robustness of fragmentation effects during different economic cycles.
Excerpt from the Book
3.2 The modeling framework
The macroeconomic variables used for the model and derived from the available data are: GDP growth rate, unemployment rate, and inflation rate. Together with the fragmentation indicators, these variables are worked into the following equation which constitutes the basic modeling framework:
Xt - Xt-1 = α0 + α1 NPCt + α2 NSMt + α3 NPCt·DYt + α4 NSMt·DYt + α5 DYt + α6 DUt + α7 INFLt + εt
Xt : fiscal policy variable (deficit, expenditure or revenues)
DY: change in GDP growth rate
DU: change in unemployment rate
INFL: inflation rate
On the left-hand side of the equation we find the dependent variable, denoted with Xt. This is the particular fiscal policy variable of interest and can be either budget deficit, total expenditure or total revenues. The change in the chosen dependent variable from time period t minus 1 to t is set in relation to the two fragmentation indicators, namely NPC and NSM, and the macroeconomic variables DY, DU and INFL. As can be seen, the equation also includes the interactive terms NPC*DY and NSM*DY. This is done in order to measure the interactions of NPC and NSM with the GDP growth rate separately. As usual, the defect term ε denotes “white noise”.
Summary of Chapters
1 Introduction: Defines political fragmentation and the "common pool" hypothesis, outlining the distinction between legislative and executive fragmentation.
2 Research Overview: Discusses early "weak government" hypotheses by Roubini and Sachs and the subsequent critique leading to the focus on executive cabinet size.
3 The Kontopoulos/Perotti model: Details the criteria for the OECD country panel data and defines the mathematical modeling framework used to test the fragmentation hypothesis.
4 The Analysis: Presents empirical results for different decades, highlighting the higher significance of executive fragmentation over legislative fragmentation, and tests the results for robustness.
5 Concluding comments: Summarizes that while executive fragmentation (cabinet size) significantly impacts fiscal policy, the evidence for legislative fragmentation remains weak and inconsistent.
Keywords
Fiscal Policy, Fragmentation, OECD, Budget Deficit, Government Expenditure, Cabinet Size, Coalition Size, Political Economy, Common Pool Model, Regression Analysis, Macroeconomic Variables, Fiscal Consolidation, Robustness, Sensitivity, Business Cycle
Frequently Asked Questions
What is the fundamental focus of this paper?
The paper examines whether fragmented government structures—both legislative and executive—influence fiscal outcomes like budget deficits and public expenditures.
What are the central themes of the work?
The main themes include the "common pool" theory, the difference between legislative and executive fragmentation, and the empirical testing of these factors across OECD nations.
What is the primary research question?
The core question is whether empirical evidence supports the hypothesis that a higher number of political decision-makers leads to fiscal profligacy.
Which scientific methodology is employed?
The paper utilizes a meta-analytical approach by reviewing literature and analyzing panel data regressions (1960–1995) to test the robustness of the fragmentation hypothesis.
What topics are covered in the main body?
The main body covers the theoretical models (Common Pool), the empirical modeling framework, regression results for specific decades, and sensitivity analyses regarding economic cycles.
Which keywords best characterize the study?
Key terms include Fiscal Policy, Fragmentation, Cabinet Size, OECD, and Budget Deficit.
How does cabinet size (executive fragmentation) differ from legislative fragmentation?
Cabinet size represents executive fragmentation and appears more robust in explaining fiscal outcomes, whereas legislative fragmentation is often considered more difficult to measure and less consistent in its effects.
Why are "good" and "bad" economic times relevant to this analysis?
The analysis shows that the influence of fragmentation on fiscal outcomes is not uniform; it becomes significantly more pronounced during periods of economic contraction (bad times).
- Citation du texte
- Martin Switaiski (Auteur), 2004, Fiscal Policy and Fractionalization, Munich, GRIN Verlag, https://www.grin.com/document/22540
