1. Engineering Good Times: Fiscal Manipulation in a Global Economy Angela O’Mahony University of British Columbia Political Science

2. Motivation Gov’ts more likely to be reelected in good times. Will gov’ts engage in pre-electoral fiscal manipulation to engineer good times? Gov’t’s decision to manipulate fiscal policy prior to an election is mediated by its international monetary and trade ties

3. Likelihood of pre-electoral fiscal manipulation Clark & Hallerberg Exchange Rate Trade Openness Low High Flexible Low High Fixed High Low

4. Likelihood of pre-electoral fiscal manipulation Clark & Hallerberg Exchange Rate Based on Mundell-Fleming: Flexible Low Perfect capital mobility Constant prices Fixed High

5. Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLow  G desire for fiscal manipulation FixedHighLow

6. Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLow  International shocks  G desire for fiscal manipulation FixedHigh

7. Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLow  International shocks  G desire for fiscal manipulation FixedHigh

8. Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High  Flexibility   Effectiveness of fiscal manipulation LowHigh Low

9. Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High  Flexibility   Effectiveness of fiscal manipulation LowHigh Low

10. Likelihood of pre-electoral fiscal manipulation Exchange Rate When exchange rate is flexible, fiscal manipulation only when benefit is high  Flexibility   Effectiveness of fiscal manipulation Benefit increases in trade openness

11. Likelihood of pre-electoral fiscal manipulation Exchange Rate When exchange rate is flexible, fiscal manipulation only when benefit is high  Benefit as  trade openness  Flexibility   Effectiveness of fiscal manipulation

12. Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLowHigh FixedHighLow

13. Likelihood of pre-electoral fiscal manipulation Exchange Rate When the exchange rate is fixed, fiscal manipulation leads to an appreciation of the real exchange rate Real exchange rate appreciation erodes international competitiveness

14. Likelihood of pre-electoral fiscal manipulation Exchange Rate When the exchange rate is fixed, fiscal manipulation leads to an appreciation of the real exchange rate Real exchange rate appreciation erodes international competitiveness

15. Likelihood of pre-electoral fiscal manipulation Exchange Rate Trade Openness Low High FlexibleLowHigh FixedHighLow

16. Likelihood of pre-electoral fiscal manipulation My Argument Exchange Rate Trade Openness Low High FlexibleLowHigh FixedHighLow

17. Sample: 20 OECD countries, 1974-2000 (437 obs) DV:  in gross gov’t debt as a % of GDP Elections Under Fixed Exchange Rate (+) 5.46 (2.26) ** Elections Under Fixed ER x Trade Openness (-) -5.61 (2.95) * Elections Under Intermediate Exchange Rate 0.47 (2.76) Elections Under Intermediate ER x Trade Openness 0.96 (4.85) Elections Under Flexible Exchange Rate (-) -4.06 (2.13) * Elections Under Flexible ER x Trade Openness (+) 6.94 (3.57) *

18. Sample: 20 OECD countries, 1974-2000 (437 obs) DV:  in gross gov’t debt as a % of GDP Elections Under Fixed Exchange Rate (+) 5.46 (2.26) ** Elections Under Fixed ER x Trade Openness (-) -5.61 (2.95) * Elections Under Intermediate Exchange Rate 0.47 (2.76) Elections Under Intermediate ER x Trade Openness 0.96 (4.85) Elections Under Flexible Exchange Rate (-) -4.06 (2.13) * Elections Under Flexible ER x Trade Openness (+) 6.94 (3.57) *

19. Sample: 20 OECD countries, 1974-2000 (437 obs) DV:  in gross gov’t debt as a % of GDP Elections Under Fixed Exchange Rate (+) 5.46 (2.26) ** Elections Under Fixed ER x Trade Openness (-) -5.61 (2.95) * Elections Under Intermediate Exchange Rate 0.47 (2.76) Elections Under Intermediate ER x Trade Openness 0.96 (4.85) Elections Under Flexible Exchange Rate (-/=) -4.06 (2.13) * Elections Under Flexible ER x Trade Openness (+) 6.94 (3.57) *

20. Sample: 20 OECD countries, 1974-2000 (437 obs) DV:  in gross gov’t debt as a % of GDP Elections Under Fixed Exchange Rate (+) 5.46 (2.26) ** Elections Under Fixed ER x Trade Openness (-) -5.61 (2.95) * Elections Under Intermediate Exchange Rate 0.47 (2.76) Elections Under Intermediate ER x Trade Openness 0.96 (4.85) Elections Under Flexible Exchange Rate (-/=) -4.06 (2.13) * Elections Under Flexible ER x Trade Openness (+) 6.94 (3.57) *

21. Pre-electoral fiscal manipulation as trade openness varies

23. Conclusion Mundell-Fleming framework Substantive importance: EMU International ties matter