Budget deficit and debt accumulation: An empirical test of two theories

The goal of this study is to empirically evaluate two competing models which aim at explaining persistent public sector deficits. The thesis is comprised of two essays. The two essays, although separate, are unified under the heading of the new political theories of deficits and debt accumulation.; The first essay, "Tax Smoothing: An Empirical Test of Barro's Hypothesis" (Barro 1979, 1986), examines the use of debt to smooth out tax revenues over time so that tax distortion is minimized. Barro's hypothesis is tested using a data set containing 14 countries over the period 1972--2003. The empirical findings are mixed in that the Barro's equation did not perform well, whereas an alternative specification did.; The second essay, "Strategic Behavior of Politicians Model", is based on two seminal papers in political theory of deficits and debt accumulation by Persson and Svensson (1989) and Alesina and Tabellini (1990). The essence of those two models is that political deficits and debt issuance are used "strategically" by current "rulers" to influence the fiscal decisions of those who will succeed them. The propositions advanced in these papers are tested using two sets of data. The full sample consists of 53 countries, and the second is limited to some 20 OECD countries. The period under study is 1970--2003.; The empirical findings confirm the theoretical notion that deficits and debt are used strategically by politicians.