Fiscal stance, election year and 2007 crisis, evidence from OECD countries (1980–2017)

The purpose of this article is to explain the rapid narrowing of fiscal room of manoeuvre following the 2007 crisis in the Eurozone by analyzing the fiscal cyclicality of a sample of 19 OECD countries over the period 1980–2017, with a focus on the election year, the government ideology and the pre-crisis period. We adopt a comparative approach based on the introduction in the dynamic panel model the dummy variables relating to the subgroups of the sample and applying the system generalized method of moments (GMM) estimator. During the period before the crises, in the upswings in the Eurozone, we find evidence for the existence of procyclical stance in the election year with a symmetric effect regarding to the government’s ideology. Also, in the downturns, the election year leads to a countercyclical fiscal stance in the non-PIIGS countries with a larger effect in the case of left-wing government. Moreover, the effect of the left-wing government in the downturns depends exclusively on electoral motivations in the Eurozone but both electoral motivations and Keynesian ideologies in non-Eurozone countries. Then we show that the change in the fiscal stance due to political factors has contributed to weakening the resilience to the 2007 crisis particularly in Eurozone countries.