Fiscal Policy in a Debt Crisis - A Model
Nicolas Afflatet ()
Additional contact information
Nicolas Afflatet: Helmut Schmidt University, Hamburg, Postal: Chair for Public Economics
No 160/2015, Working Paper from Helmut Schmidt University, Hamburg
In the existing literature, fiscal policy in times of budget crises is considered above all from an empirical point of view. Until now, no model explaining the processes and forces at work has been developed. This article closes this gap. The model presented is based on the theory of political business cycles and the market discipline hypothesis. Unemployment, the voters’ preference for a sustainable deficit policy and the probability of a sovereign default are the determinants influencing the deficit. As a result the deficit falls high if fiscal policy is effective in reducing unemployment, if voter prefer deficits rather than balanced budgets, if financial markets do not react to lasting deficits and if the natural rate of unemployment is high.
Keywords: budget consolidation; debt crisis; political business cycles; market discipline hypothesis; economic voting (search for similar items in EconPapers)
JEL-codes: H62 (search for similar items in EconPapers)
Pages: 18 pages
New Economics Papers: this item is included in nep-fdg
References: Add references at CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
http://www.hsu-hh.de/fgvwl/index_IjnIf2P3tKys9N9Q.html Full text (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ris:vhsuwp:2015_160
Access Statistics for this paper
More papers in Working Paper from Helmut Schmidt University, Hamburg Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Bekcmann ().