Does direct democracy matter for fiscal policy volatility?

This study examines the relationship between direct democracy and fiscal policy volatility in a global sample of 131 countries during 1975-2018. The results show that direct democracy is an important factor when shaping fiscal policy volatility outcomes. The estimates reveal that a higher direct democracy potential decreases fiscal policy volatility. The observed negative link between direct democracy and policy volatility is robust to the inclusion in the analysis of different explanatory variables that may affect both direct democracy and fiscal volatility. Likewise, the findings do not depend the econometric specification, the identification of the discretionary component of fiscal policy or the impact of outliers. A closer look at different institutions reveals that the observed negative effect is due to the scope of bottom- up participatory procedures such as citizen initiatives rather than to top-down mechanisms like plebiscites or obligatory referendums.