Abstract
Using data for a large panel of countries, this paper investigates the role played by income inequality and fiscal stimuli episodes in shaping the likelihood of political stability. By means of Tobit estimations, we show that a rise in inequality increases the probability of government crises. However, such adverse distributional effect is reduced when expansionary or increasingly expansionary fiscal stimuli episodes or successful fiscal stimuli programs are put in place.
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Notes
For instance, Martins and Veiga (2014) find that the size of the government (as a percentage of GDP) has a nonlinear impact on human development, with the effect being particularly large in developed economies and high-income countries.
For these reasons, the Tobit model is more appropriate that other econometric methods, including the pooled IV framework which was used by Agnello et al. (2016) to address a similar question.
Rigobon and Stoker (2009) show that the true effects tend to be systematically lower than the estimated effects when one uses OLS or IV estimators with bound censoring.
In order to save space, the full list of countries included in the analysis is not reported in the paper. However, it is available from the authors upon request. The presence of missing values for several variables and the limited time span of fiscal variables, especially in the case of developing countries, reduce the number of countries included in each model specification. Please refer to Table 11 in Appendix for the descriptive statistics of the variables used in this study.
The CNTS dataset contains a wide range of domestic conflict event rata (such as anti-government demonstrations, assassinations, general strikes, guerrilla warfare, major government crises, purges, riots and revolutions), legislative process data (namely the competitiveness of nominating process, the effectiveness and the size of legislature, the number of seats of the largest party in legislature, and the party coalitions and legitimacy), political data (such as the changes in effective executive, the degree of parliamentary responsibility, the legislative effectiveness and selection, the number of coups d’Etat, the number of legislative elections, the number of major constitutional changes, the number of major cabinet changes, the party fractionalization index, the size of cabinet and the type of regime). Due to data availability and country coverage, we use Government Crisis as our measure of political instability.
We thank an anonymous referee for raising this point.
Romer and Romer (2010) use a “narrative record” of budget laws, Congressional reports, executive branch documents and presidential speeches to identify the size, timing and motivation for major tax policy actions. Devries et al. (2011) identify episodes of large fiscal adjustments by looking at IMF and OECD historical reports and checking what countries intended to do when the reports were published. This policy action-based approach makes use of descriptive historical facts that usually depict what happened to the public deficit in a particular period but do not go into the details of policymakers’ intentions and discussions or congressional records.
More specifically, it covers 17 OECD countries over the period 1978–2009.
The statistical approach may generate an upward bias towards evidence corroborating non-Keynesian effects (Afonso and Jalles 2014). Non-policy factors (including price fluctuations) can affect the computation of CAPB. Additionally, fiscal measures include the discretionary reaction to the dynamics of real economic activity.
In particular, it largely relies on judgment calls, and it may not entirely eliminate endogeneity problems (that is, fiscal policy reacting to output performance and not the other way around).
See Greene (2012, pp. 848–850).
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Acknowledgements
Castro and Sousa acknowledge that this work has been financed by Operational Programme for Competitiveness Factors—COMPETE and by National Funds through the FCT—Portuguese Foundation for Science and Technology within the remit of the project “FCOMP-01-0124-FEDER-037268 (PEst-C/EGE/UI3182/2013)”. Castro also wishes to thank the financial support provided by the Portuguese Foundation for Science and Technology under the research grant SFRH/BSAB/113588/2015 (partially funded by COMPETE, QREN and FEDER). The authors thank the editor, Kimberley Scharf, and two anonymous referees for helpful comments and suggestions.
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Agnello, L., Castro, V., Jalles, J.T. et al. Income inequality, fiscal stimuli and political (in)stability. Int Tax Public Finance 24, 484–511 (2017). https://doi.org/10.1007/s10797-016-9428-x
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DOI: https://doi.org/10.1007/s10797-016-9428-x
Keywords
- Income distribution
- Fiscal stimuli
- Expansionary policies
- Political environment
- Institutional quality
- Tobit regression