FISCAL-POLICY, PUBLIC DEBT STABILIZATION AND POLITICS - THEORY AND UKEVIDENCE

This paper presents a two-party model of fiscal and debt policy in whi ch the parties do not care about policy outcomes when out of office. U nlike other models of this type, our model has predictions that are la rgely consistent with existing empirical findings about partisan and e lectoral effects on government expenditure, tax revenue, and debt. It also yields new predictions about how the feedback of fiscal policy on lagged debt may depend on partisan and electoral effects. These new p redictions are not rejected by a test of the model on UK data.