Fiscal policy and politics: theory and evidence from Greece 1960-1997

We present a two-party dynamic model of optimal fiscal policy which integra tes stabilizing, electoral and partisan motives. The political equilibrium determines the path of government expenditures, taxes and debt. It shows ho w electoral and partisan policies weaken stabilizing feedback efforts. When we use Greek data, the theoretical restrictions are not rejected and we ge t sensible estimates. The early period 1960-1973 and the Maastricht Treaty period 1993 to today differ from the period in between, 1974-1992. There is evidence of pre-election cycles during 1960-1992. There are no partisan di fferences; both Conservative and Socialist administrations can be equally b lamed for fiscal laxity. The latter started in 1974, became stronger in the late 1970s and continued until the early 1990s. (C) 2001 Elsevier Science B.V. All rights reserved.