Working Paper: CEPR ID: DP6875
Authors: Marco Buti; Alessandro Antonio Turrini; Paul Van Den Noord; Pietro Biroli
Abstract: European policy makers, notably in the euro area, seem to take for granted that the electorate will punish them for bold reform in product and labour markets. This may explain why progress in the euro area has been comparatively limited. This paper posits and, using a dataset for 21 OECD countries, shows that this fear of electoral backlashes is unfounded, provided that financial markets work well. The mechanisms involved are relatively straightforward: well functioning financial markets "bring forward" future yields of structural reform to the present, thus permitting to overcome possible short-run costs. As a result, the electorate tend to reward, not punish, reformist governments. This has important implications for the design of structural reform packages, with financial market reforms being an essential ingredient beside product and labour market reforms.
Keywords: Economic and Monetary Union; Electoral Cycle; Financial Markets; Structural Reforms
JEL Codes: E61; H30; H60; H70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| well-functioning financial markets (G10) | mitigate short-term costs of structural reforms (E69) |
| mitigate short-term costs of structural reforms (E69) | positively influence reelection probabilities of reformist governments (D72) |
| financial markets are well-developed (G15) | reforms increase probability of reelection (D72) |
| structural reforms (E69) | negligible direct effect on reelection probabilities (D79) |
| well-functioning financial markets (G10) | enhance positive reception of reforms by electorate (D78) |
| economic upturns (E32) | reforms positively received (E69) |
| financial markets facilitate acceptance of reforms (G18) | voters perceive immediate benefits (D72) |