The determinants of the volatility of fiscal policy discretion

Abstract

We investigate the determinants of the volatility of fiscal policy discretion. Using a linear dynamic panel dataset model for 104 countries from 1980 to 2006 and a system-GMM estimator,we find that more government instability, less democracy and presidentialist systems increase the volatility of the discretionary component of fiscal policy. Additionally, we show that countries with a larger size, a smaller degree of financial openness, and a stable exchange rate system are more insured against the uncertainty about the conduct of fiscal policy. Our results are robust to various regional dummy variables, diferent sub-sets of countries and the presence of high inflation and crisis episodes.