Democracy and fiscal support during the COVID-19 pandemic: an empirical investigation

ABSTRACT

Democracies are expected to implement expansionary fiscal policies to accelerate economic recovery in crisis times. However, as experienced in the 2008 global financial crisis, democratic countries sometimes tend to adopt austerity measures during crises. This paper examines the relationship between democracy and fiscal support during the COVID-19 pandemic. The empirical findings confirm the positive impact of democracy on fiscal support. As we unbundle the effects, democracy has a significant effect for the non-health sector, but the effect is insignificant for the health sector.

KEYWORDS:

• COVID-19
• democracy
• fiscal support
• instrumental variable
• IMF datasets
• 2SLS

JEL CLASSIFICATION:

• D72
• H12
• H30

Acknowledgement

We would like to thank Sezgin Uysal for his help on data processing.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ There are different measures used for democracy in the empirical literature. It is important to re-examine the regressions by using various democracy proxies to check whether our main conclusion on the impact of democracy is robust. To check this, we use different proxies for democracy in Appendix Table A3. Please check Appendix Table A2 for data sources for these different democracy proxies.

² Our results are also robust to adding historical and cultural characteristics of countries and controlling for macroeconomic variables. We provide these results in Appendix Tables A4 and A5.