The dynamics of budget deficit uncertanity: An evidence of panel data analysis

The main aim of this study is to examine the political, economic and financial factors that affect budget deficit uncertainty. For this purpose, some of the hypotheses that explain the dynamics of budget deficits are discussed within the context of budget deficit uncertainty. While testing the effects of political, economic and financial factors on budget deficit uncertainty empirically, the country ranking of the European Union with respect to debt levels is taken into account. In this context includes 25 years of data (1992-2016) for 48 countries in total which is analyzed through dynamic panel data methods. The evaluation of economic, political and financial factors of budget deficits and the causal link between the budget deficits and its volatility could be noted as the original aspects of this study. The empirical finding of this study indicates a significant and positive relation between the uncertainty of budget deficits and the debt level. In other words, as the indebtedness of countries increases, the uncertainty of budget deficits also increases. On the other hand, the relation between the budget deficit uncertainty and the political risk index which is an indicator of political and institutional factors is also significant and positive. That means, as the political risk index increases, the uncertainty of budget deficits increases. Finally, public expenditures are found more effective than public revenues while reducing the uncertainty of budget deficits. This finding for the related data set is in line with the fiscal synchronization hypothesis which is proposed by Musgrave, Meltzer and Richard (1966).