Over the past decade, the most salient changes in macroeconomic conditions in developed economies have included rising government debt and population aging, which are strongly correlated with each other. This paper investigates fiscal multipliers by disentangling the effects of population aging from those of government debt. Our analysis, which uses heterogeneous panel data from 24 OECD economies, shows that while fiscal policy is ineffective for economies with high-debt levels, it is effective for economies with low-debt levels. Furthermore, the estimation results reveal that fiscal policy is ineffective for aged economies, regardless of the level of government debt. However, for nonaged economies, while fiscal policy leads to negative effects on output in times of high debt, its positive effects are more pronounced in times of low debt. Our results suggest that, for the effective implementation of fiscal stimulus policies, policy-based stimulation of employment in the labor market is essential.

States require money to function and therefore every government has to continuously raise new funds. On the financial markets, governments cannot be sure that auctions of their debt will be sufficiently attractive to financial investors, which is why they usually enter into cooperative agreements with selected banks. The best known and most widespread form of cooperation is the primary dealer system. A primary dealer is a bank that commits to purchasing a certain percentage of government debt at each auction and to intervene as a formalized market maker in the debt market if necessary. Most of the primary dealer systems involve the banks being financially neither remunerated nor compensated for their activities, and if there is some kind of financial compensation, it is on a low level. The article analyses European primary dealer systems and asks why banks are willing to participate in these systems. I will show that both domestic and foreign banks use their status as primary dealers to build long-term relationships with one or more European governments and to gain an advantage on the global stage. In Bourdieu’s terms, primary dealer banks use their financial capital to accumulate social and symbolic capital.

Developing countries are often thought to be particularly exposed to the constraints of global markets. Facing scrutiny from foreign investors, why do developing-country governments enter international bond markets, especially when they can access cheaper finance from international financial institutions? I argue that borrowing governments' perception of market constraints depends on global liquidity. When bond markets are highly liquid, investors become more risk acceptant and governments perceive the political costs of borrowing to be lower, especially compared to the conditionality of concessional loans. I use data on the timing of bond issues and three case studies—Ethiopia, Ghana, and Kenya—to demonstrate that choices to issue debt were shaped by global liquidity. These findings nuance debates about how markets constrain governments, emphasizing that market constraints are conditional on systemic factors, including, global liquidity.

Public opinion on complex policy questions is shaped by the ways in which elites simplify the issues. Given the prevalence of metaphor and analogy as tools for cognitive problem solving, the deployment of analogies is often proposed as a tool for this kind of influence. For instance, a prominent explanation for the acceptance of austerity is that voters understand government deficits through an analogy to household borrowing. Indeed, there are theoretical reasons to think the household finance analogy represents a most likely case for the causal influence of analogical reasoning on policy preferences. This article examines this best-case scenario using original survey data from the United Kingdom. It reports observational and experimental analyses that find no evidence of causation running from the household analogy to preferences over the government budget. Rather, endorsement of the analogy is invoked ex post to justify support for fiscal consolidation.

Recent work on optimal monetary and fiscal policy in New Keynesian models has tended to focus on policy set by an infinitely lived benevolent policy maker, often with access to a commitment technology. In this paper, we explore deviations from this ideal, by allowing (time-consistent) policy to be set by a process of bargaining between two political players with different weights on elements of the social welfare function. We characterize the (linear) Markov perfect equilibrium and, in a series of numerical examples, we explore the resultant policy response to shocks which cannot be perfectly offset with the available instruments due to their fiscal consequences. We find that, even although the players, on average, have the socially desirable objective function, the process of bargaining implies an outcome which deviates from the time-consistent policy chosen by the benevolent policy maker. Moreover, the range of instruments available mean that policy makers will bargain across the entire policy mix, sometimes implying outcomes which are quite different from those that would be chosen by a single policy maker. These policy outcomes depend crucially on the nature of the conflict and also the level of government debt.

How do domestic and global factors shape governments’ capacity to issue debt in primary capital markets? Consistent with the ‘democratic advantage’, we identify domestic institutional mechanisms, including executive constraints and policy transparency, that facilitate debt issuance rather than electoral events. Most importantly, we argue that the democratic advantage is contingent: investors’ attention to domestic politics varies with conditions in global capital markets. When global financial liquidity is low, investors are risk-averse, and political risk constrains governments’ capacity to borrow. But when global markets are flush, investors are risk-tolerant and less sensitive to political risk. We support our argument with new data on 245,000 government bond issues in primary capital markets – the point at which governments’ costs of market access matter most – for 131 sovereign issuers (1990–2016). In doing so, we highlight the role of systemic factors, which are under-appreciated in much ‘open economy politics’ research, in determining access to capital markets.

Labour market regulation varies significantly, both within and between developed democracies. While there has been extensive research and debate in economics on the consequences of labour market regulation, the political causes for levels and changes in labour market regulation have received less scholarly attention. This article investigates a political economy explanation for differences in labour market regulation building on a theoretical argument that labour regulation can be used as a nonfiscal redistribution tool. Consequently, partisanship, the demand for redistribution and government budget constraint jointly determine whether labour market regulation will increase or decrease. Consistent with this argument, panel analyses from 33 Organisation for Economic Co-Operation and Development countries reveal that labour market regulation increases under left-wing governments that face increased market inequality and high government debt.

This study presents an overlapping-generations model featuring capital accumulation, collective wage-bargaining, and probabilistic voting over fiscal policy. The study characterizes a Markov-perfect political equilibrium of the voting game within and across generations, and it derives the following results. First, the greater bargaining power of unions lowers the capital growth rate and creates a positive correlation between unemployment and public debt. Second, an increase in the political power of elderly persons lowers the growth rate and shifts government expenditure from unemployed persons to elderly ones. Third, prohibiting debt finance increases the growth rate and benefits future generations; however, it worsens the state of present-day employed and unemployed persons.

This paper analyzes the determination of public debt in a dynamic politico-economic model with overlapping generations. Sizeable levels of public debt can be rationalized in this model. The elasticity of substitution between public and private consumption determines the size of public debt and could explain differences of debt across countries. I compare the optimal policies under commitment and in a “political equilibrium” without commitment. Public debt can be higher or lower when commitment is absent, depending on the elasticity of substitution between public and private consumption. Consequently, under certain conditions, the no-commitment debt level can be closer to a normative benchmark with higher weight for future generations.

Do coalition governments really suffer from short time horizons in fiscal policymaking, as posited by standard political-economy models? This article focusses on coalitions that have created high levels of familiarity through shared governing experiences in the past and that are likely to cooperate again in future governing coalitions. I argue that such coalitions have incentives to internalise the future costs of debt accumulation and reach credible agreements to balance their constituencies’ fiscal preferences. Moreover, sustaining broad coalitions should have electoral advantages to implementing controversial economic reforms, thus resulting in lower debt increases compared not only with less durable coalitions but also with single-party governments. Comparing 36 economically advanced democracies between (up to) 1962 and 2013, I estimate the effects of coalitions’ cooperation prospects on the dynamics of public debt. The findings indicate that long time horizons can help coalitions to overcome intertemporal coordination problems and to reach specific policy goals.

We develop a macroeconomic model in which the government does not guarantee to repay debt. We ask whether movements in the price of government bonds can be rationalized by lenders' unwillingness to fully roll over debt when the outstanding level of debt exceeds the government's repayment capacity. Investors do not support a Ponzi game in this case, but ration credit supply, thus forcing default at an endogenously determined fractional repayment rate. Interest rates on government bonds reflect expectations of this event. Numerical results show that default premia can emerge at moderately high debt-to-GDP ratios where even small changes in fundamentals lead to steeply rising interest rates. The behavior of risk premia broadly accords with recent observations for several European countries that experienced a worsening of fundamental fiscal conditions.

This article argues that the crisis in euro area government bond markets reflects the same kind of stability challenges financial intermediaries face when confronted with a negative macroeconomic shock without having access to a lender of last resort. Nineteenth-century US banks operated under such a framework and used clearing houses in times of crisis as a co-insurance mechanism against contagious runs. Their experience provides valuable lessons for the ongoing reform efforts in the euro area. The analysis reveals that most of the instruments clearing houses used in the joint production of confidence are similar to the ones euro area governments have recently decided upon, such as the establishment of the European Financial Stability Facility. This suggests that the euro area crisis response has followed best private-sector practices of crisis management. However, inherent fragilities of co-insurance mechanisms as well as the long maturity and elusive quality of government debt present a challenge in designing a sustainable solution to the crisis without compromising on the original goal of euro area governance: ensuring sound fiscal policies as a prerequisite for maintaining price stability. To meet this challenge a substantially more comprehensive economic and political union might be needed.

Macroeconomic theory clearly suggests that at the zero lower bound, fiscal contraction will reduce output and slow any recovery. Yet in 2010 the focus of fiscal policy in many countries switched from supporting activity to reducing debt, despite the fact that the recovery from recession often appeared weak. While high levels of public debt can explain this switch in some countries, it does not provide a satisfactory account in others. In addition, the possibility of using balanced budget fiscal expansion or tax switches that bring forward spending remain largely unexplored. This paper suggests that policy has been influenced by an opposition to countercyclical fiscal policy which has ideological roots.