Trust in government and fiscal adjustments

Dirk Bursian, Alfons Weichenrieder and Jochen Zimmer

No 22, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: The paper looks at the determinants of fiscal adjustments as reflected in the primary surplus of countries. Our conjecture is that governments will usually find it more attractive to pursue fiscal adjustments in a situation of relatively high growth, but based on a simple stylized model of government behavior the expectation is that mainly high trust governments will be in a position to defer consolidation to years with higher growth. Overall, our analysis of a panel of European countries provides support for this expectation. The difference in fiscal policies depending on government trust levels may help explaining why better governed countries have been found to have less severe business cycles. It suggests that trust and credibility play an important role not only in monetary policy, but also in fiscal policy.

Keywords: trust; debt sustainability; fiscal reaction function; euro area; EU (search for similar items in EconPapers)
JEL-codes: E62 H62 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-eec, nep-mac, nep-pbe and nep-soc
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https://www.econstor.eu/bitstream/10419/88736/1/775711934.pdf (application/pdf)

Related works:
Journal Article: Trust in government and fiscal adjustments (2015)
Working Paper: Trust in Government and Fiscal Adjustments (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:22

DOI: 10.2139/ssrn.2280367

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