Determinants of budget deficits: Focus on the effects from the COVID-19 crisis

TL;DR

This paper analyzes how the COVID-19 pandemic affected the determinants of budget deficits across 43 countries, revealing increased effects of macroeconomic factors and highlighting the role of economic development and debt levels.

Contribution

It investigates the changing impact of macroeconomic determinants on budget deficits during COVID-19 using a system GMM approach across multiple countries.

Findings

COVID-19 increased the magnitude of macroeconomic effects on budget deficits.

More developed economies could implement larger stimulus packages.

Higher domestic currency debt levels influenced fiscal response capacity.

Abstract

This paper revisits the discussion on determinants of budget balances and investigates the change in their effect in light of the COVID-19 crisis by utilizing data on 43 countries and a system generalized method of moments approach. The results show that the overall impact of the global pandemic led to a disproportionate increase in the magnitude of the estimated effects of the macroeconomic determinants on the budget balance. However, we also find that more developed economies were able to undertake higher stimulus packages for the relatively same level of primary balance. We believe that one of the factors affecting this outcome is that that they exhibit a higher government debt position in domestic currency denomination.