The political business cycle if the government is not myopic

Abstract

Abstract Using the framework of the Nordhaus model, a long-run and a short-run model of the political business cycle are integrated. It is shown that under general conditions the optimal policy for a vote-maximizing government will lead to the generation of a political business cycle, providing some dynamic tradeoff exists between politically relevant variables. If government and voters apply the same discount rate, the average unemployment rate will be higher — and conversely, the average inflation rate lower — than the socially optimal one.