The determinants of the volatility of fiscal policy discretion

We investigate the determinants of the volatility of fiscal policy discretion. Using a linear dynamic panel dataset model for 104 countries from 1980 to 2006 and a system-GMM estimator,we find that more government instability, less democracy and presidentialist systems increase the volatility of the discretionary component of fiscal policy. Additionally, we show that countries with a larger size, a smaller degree of financial openness, and a stable exchange rate system are more insured against the uncertainty about the conduct of fiscal policy. Our results are robust to various regional dummy variables, diferent sub-sets of countries and the presence of high inflation and crisis episodes.The authors would like to thank the following for helpful comments: the Editor, two anonymous referees and participants at the 2009 Annual Meeting of the European Economic Association and the Econometric Society, the Economic Policies Research Unit (NIPE) seminar organised by the University of Minho, the First International Symposium in Computational Economics and Finance (ISCEF 2010), the 2010 Annual Meeting of the European Public Choice Society, the workshop on ‘International Political Economy and Cross-Border Effects’ organised by Queen Mary University of London and the UECE Conference on Economic and Financial Adjustments in Europe