Central-Bank Independence and Political Business Cycles

Abstract

The political business cycle, by which one means fluctuations in economic activity that correspond to the electoral cycle, can be observed in many countries. The classic study of the political business cycle is Tufte (1978), in which he presented basic evidence of cyclical movements in policy instruments and in measures of economic activity that correlate with the political cycle and peak around election time. (We discuss below more formal econometric evidence.) For example, for the United States from 1948 to 1976, he argues that, with the exception of the Eisenhower years in the 1950s, political business cycles have consisted of a two-year cycle in “real disposable income, with accelerations in even-numbered years and decelerations in odd-numbered years,” as well as four-year cycle “in the unemployment rate, with downturns in unemployment in the months before a presidential election and upturns in the unemployment rate usually beginning from twelve to eighteen months after the election” (Tufte, 1978, p. 27) He similarly argues there is clear evidence of a political cycle in outcomes in other democratic countries as well, in that “short-run accelerations in real disposable income per capita were more likely to occur in election years than in years without elections” (p. 11) in a sample of twenty-seven countries.