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Essays in Fiscal Policy Behavior Open Access

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The first chapter analyzes large debt reduction episodes comparing the role of fiscal consolidation to other ways debt has been reduced. It identifies 133 episodes using data from the 1970s to 2008 for a sample of advanced and developing countries. It decomposes the evolution of the debt-to-GDP ratio across these episodes into the primary balance, nominal returns, inflation, and GDP growth rates. While developing countries benefitted from favorable debt dynamics (a combination of high growth and low real interest rates), most advanced countries reduced debt through sustained consolidation efforts focused on spending cuts. The amount of debt reduced by consolidating, however, is modest when compared to debt reduced through favorable dynamics or in episodes of debt reduction that occurred with default and restructuring. The second chapter provides empirical evidence on the determinants of public sector spending volatility. Using a panel regression across 118 countries between 1980 and 2006, it studies what triggers government spending volatility with a particular attention to the role of financing constraints (domestic financial depth and financial openness) and controlling for political economy, structural and macroeconomic factors. It uses several estimators including GMM and finds the type of financing matters for volatility. Higher access to external finance increases spending volatility. The positive impact of financial openness on spending volatility is especially pronounced in emerging and low-income countries. In contrast, higher access to domestic finance, decreases volatility. The relationship between financial depth and spending volatility exhibits nonlinearities corresponding to income group. In low-income countries higher financial depth decreases volatility; while in emerging markets it increases volatility; there is no impact in advanced. In the last chapter, I compile the first large cross-country panel dataset of public sector performance and efficiency, encompassing 114 countries. The dataset includes about 900 observations for the health sector starting in 1997 and 1,800 country-year observations for the education sector from 1980. I regress these indicators on potential economic, institutional, demographic, and geographic determinants. I find richer countries exhibit better public sector performance and efficiency, and that government accountability and demographic factors play a significant role. There are diminishing returns to investments in health and education and I find that higher government expenditure relative to GDP tends to be associated with lower efficiency in the respective sector. I find limited evidence that the relationship between the determinants of public sector performance and efficiency significantly differs by income group.

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