Abstract
Nordhaus's (1975) model of the political business cycle is extended in this paper by explicitly formulating the link between the economic sphere (represented by the Phillips curve) and fiscal policy. This extended model yields the hypothesis that during an electoral period the budgetary policy is contractionary in the first half and expansionary in the second half with the consequences of a reduction in unemployment (increase in inflation) before elections and a rise in unemployment (decrease in inflation) after elections. This hypothesis is tested against the data of the Austrian economy by a non-parametric test (which leads to a rejection of our hypothesis for Austria). The extent of the political business cycle bias is demonstrated by policy simulations within a macroeconomic model.
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