Economic and political determinants of budget deficits in developing countries

Abstract

The evidence from a large sample of developing countries tends to reject the empirical implications of optimizing models of the process of determination of fiscal deficits, tax rates, seigniorage and inflation. The paper also presents some preliminary evidence that an important reason for the failure of the equilibrium approach to fiscal policy is that fiscal deficits are partly determined by political factors and that cross-country differentials in budget deficits may depend on measures of political instability. In particular, as suggested by a number of recent theoretical approaches, an increase in the degree of political instability appears to lead to greater budget deficits.

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