Government Strength and Public Debt Redux

This paper tests the influence of government strength on the size of annual debt accumulation through budget deficits in 14 EU-countries from 1970 to 2002. We measure government strength by the Banzhaf index of voting power and by the number of government seats in parliament. Our results indicate that models incorporating political variables as determinants of the persistence of debt accumulation shocks tend to explain the dynamics of debt accumulation in Europe better than “classical” models. The results in general lend some support to the weak government hypothesis in the sense that, first, stronger governments tend to present less persistence of debt accumulation following positive shocks. Second, coalitions formed by equally strong parties seem to have a higher persistence of positive shocks to debt accumulation. Third, stronger single party governments present lower persistence of positive shocks to debt accumulation, and single party governments tend to present less persistence than coalition governments. However, some interesting non-linearities seem to be at work in the data that revert the effect for very strong forms of government.