Explaining the Fiscal Costs of Financial Crises: New Forms of Political Business Cycles in Europe (revised title)

Thursday, April 17, 2014
12:00 PM - 1:30 PM
CISAC Conference Room
  • Mark Hallerberg

This seminar is part of the "Europe and the Global Economy" series.

How do political institutions shape the costs of responding to financial crises? Previous research contends that policy-makers in democracies choose policies less costly to taxpayers than politicians in autocracies. In this research note we re-evaluate Keefer's (2007) contribution to this body of research using an updated theoretical model as well as updated fiscal costs data, which is his dependent variable. We argue that political institutions shapes when politicians spend, rather than how much they spend, in response to financial crises.  In the updated theoretical model we include the possibility that politicians can shift crisis response costs into the future by using policies that create contingent liabilities. Politicians facing removal pressures--such as elections--have incentives to create contingent, rather than immediately realized liabilities. Empirically we illustrate this dynamic by first updating Keefer (2007) using new data on the fiscal costs of financial crises. We further substantiate our argument with Eurostat's detailed yearly, cross-country comparable data from the late 2000s financial crisis to show that politicians in democracies tend to increase contingent liabilities,  while also decreasing realized liabilities, before elections.

Mark Hallerberg is Professor of Public Management and Political Economy at the Hertie School of Governance and is Director of Hertie's Fiscal Governance Centre.  He is also a  non-resident fellow at Brussel's think tank Bruegel.

He is the author of one book, co-author of a second, and co-editor of a third. He has published over twenty-five articles and book chapters on fiscal governance, tax competition, and exchange rate choice.

Hallerberg has held professorships previously at Emory University, the University of Pittsburgh, and the Georgia Institute of Technology. He has done consulting work for the Dutch and German Ministries of Finance, Ernst and Young Poland, the European Central Bank, the German Development Corporation (GIZ), the Inter-American Development Bank, International Monetary Fund, and the World Bank.