Explaining the Responsiveness of Political Systems to Economic Downturns

A core function of the political system in advanced postindustrial economies is to provide a response to a changing fiscal environment. During downturns public budgets often need to be reined in via spending cuts or revenue increases, so-called fiscal consolidations. Although potentially unpopular among voters, a substantial literature documents that fiscal consolidations occur frequently. However, very little attention has so far been paid to the temporal variation in such responses. More precisely, we want to know why some countries are quicker to respond to downturns than others. We base our study on data from more than 30 countries from the 1960s until today. We employ a two-stage estimation strategy and, first, estimate a series of error correction models predicting the relationship between economic downturns and fiscal consolidations. The derived error correction rate from such estimations can, in the second stage, be used to capture the degree of responsiveness of individual political systems. We test a series of possible explanations for the cross-country variation in responsiveness, including the degree of institutional fragmentation, government ideology, and corporatist tradition.