Unemployment rates and political outcomes: An incentive for manufacturing a political business cycle

Abstract

In recent years the interdependence of politics and economics has received an increasing amount of attention by both economists and political scientists. The explanation for this interest lies in the 'rediscovery' of political economy and may be, at least partly, due to the recent experiences that governmental advisors have had with simultaneously increasing inflation and unemployment. Conventional macroeconomic approaches have failed to pin-point causes for the 'stagflation' and to provide methods for solving the problem. The traditional economic policies may have failed in part because these traditional solutions were simply not plausible in the political environments in which they were proposed. It is the intent of a growing body of work to develop macromodels with endogenous political sectors. The inference made in this literature is that (1) the economy can be manipulated or affected by a political sector and that (2) there is an incentive for the political sector to manipulate the economy. This literature has, however,just begun to formalize the interaction of the political and economic sectors and empirical work is virtually nonexistent.' The purpose of this paper is to present some evidence on these two inferences. In Section 1 the first inference is examined. In Section II literature on which the first inference is based is reviewed and evidence on the possible incentive to create such a cycle is presented. In Section III concluding remarks are offered.