Does Divided Government Moderate Electoral Cycles in Fiscal and Monetary Policy? Annual and Quarterly Evidence from Latin America and the Oecd
Abstract: We explore whether effective checks and balances, measured by the presence of veto players in countries with high compliance with the law, moderate electoral cycles in fiscal and monetary policy. Annual data from 39 Latin American and OECD countries over the 1980-2005 period show that the aggregate budget surplus (our fiscal variable) and the rate of change of international reserves (our monetary variable) fall significantly before elections and rise afterwards only in Latin America, not in the OECD. Quarterly data allow to identify the electoral period much more precisely, suggesting the presence of cycles in the OECD. Moreover, our measure of institutional constraints on executive discretion turns out to be significant in explaining variations in electoral cycles across regions. Quarterly data show that effective checks and balances are significant in moderating fiscal and monetary cycles in both regions.
