7 - Estimating the Fiscal Effects of Political Regimes

Summary

When the data speak for themselves through the structural breaks analysis, they typically identify political transformations as major turning points in the time series for the various fiscal indicators. These breaks generally led to significant increases in government revenues and improvements in fiscal prudence, coupled with significant reductions in sovereign credit risk. The breaks tests thus provide rigorous proof that political transformations led to large improvements in public finances.

Like the case studies before them, however, the breaks tests also reveal the impact of historical factors besides political regimes on public finances. To account for the effects of external and internal conflicts, income growth, fiscal and monetary policies, country- and time-specific effects, and other elements, econometric techniques that exploit the panel nature of the data are now employed. Estimations of panel data increase informative content by combining variations across time and country. The key strength of this approach is the ability to systematically disentangle the role of political regimes from other potentially relevant factors through the use of control variables. By explicitly accounting for historical features beyond political regimes, the econometric analysis can either ratify or reject the findings of the case studies and structural breaks tests.