DP11654 Republicans, Democrats and Budget Deficits: Fiscal Dynamics in Political Perspective

Author(s): Jaime Pereira, José Tavares
Publication Date: November 2016
Keyword(s): Asymmetric cointegration approach, Democrats, Fiscal Dynamics, Republicans
JEL(s): H30, H62, H68
Programme Areas: Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11654

We use an asymmetric cointegration framework to explore politically motivated fiscal asymmetries in the US, from Eisenhower to Obama. We analyze fiscal dynamics in response to deficits as an asymmetric process, sensitive to partisan and electoral motivations, characterizing the response of Republican and Democratic administrations to budget disequilibria. In a novel approach to empirical fiscal policy, we incorporate narrative data in our partisan framework, in order to to distinguish between responses to automatic and discretionary fiscal changes. We conclude that partisanship is a key factor in the fiscal response to budget disequlibria, with Democrats and Republicans exhibiting distinct corrective behavior. On the other hand, the timing of elections does not seem to be a key determinant of the fiscal response to unsustainable budget deviations.