Government spending, political dynamics, and economic recovery: a cross-national analysis of fiscal resilience

Abstract

Economic shocks—arising from pandemics, natural disasters, financial crises, or geopolitical conflicts—pose significant challenges to governments, requiring swift and effective fiscal responses. This study employs a Generalized Method of Moments (GMM) estimation to analyze time-series data from thirty major economies and key trading nations between 2002 and 2022, examining how economic shocks influence government expenditure decisions. Gross domestic product (GDP) serves as the primary measure of fiscal policy effectiveness in stabilizing economies. The analysis identifies key determinants of fiscal responses, including the nature of the shock, macroeconomic conditions, institutional capacity, and international economic linkages. The findings reveal a statistically significant and positive relationship between economic shocks and government spending, with fiscal interventions playing a crucial role in mitigating economic downturns. Additionally, the study underscores the importance of technological investment in fostering sustainable economic recovery. Robustness checks, including the Sargan-Hansen test, confirm the validity of the instrument variables used in the analysis. The research provides policy recommendations for enhancing fiscal resilience, emphasizing flexible and adaptive spending strategies to counteract future shocks.