Opportunistic Political Business Cycle Research Articles

An Analysis of the Existence of Political Business Cycle in Nepal

This paper tries to analyze whether the ‘Political Business Cycle (PBC)’ exists in Nepal or not. The term PBC is coined to describe the fluctuation in economic activities from the intervention of the political actors before the election expecting to be re-elected in the forthcoming election. The abuse of political power in manipulating fiscal and monetary policies by the ruling party prior to the election period has become normal in developing countries like Nepal. The incumbent tries to convince their voters by increasing the size of the populist public expenditure before or during the election period. Nepal can’t be exceptional in the case of public resource manipulation during the time of the election. Democracy was restored in Nepal after the people’s political movement of 1990 and after that six consequent general elections were completed. The study used the annual data set from 1990/91 to 2017/18 and employed the ordinary least square method in three different models to capture the relationship among the variables used in the study. Real GDP, government consumption expenditure, and fiscal deficit are used as dependent variables of each model whereas government capital expenditure, transfer payment and subsidy, and total tax revenue are taken as independent variables under the study along with introducing election as a dummy variable. The results showed a positive relationship between the variables, but not enough to confirm the opportunistic political business cycle. The study recommends policymakers ensure policy consistency considering non-intervention in fiscal policies at the time of election.

The housing business cycle of local public finance: empirical evidence from Taiwan

ABSTRACT This paper attempts to investigate the association between local public finance and housing market. We deal with the potential endogeneity problem by utilizing two-stage-least-square (2SLS) model. Our empirical results suggest that (1) the average housing price is positively and significantly associated with local revenue. (2) The average housing price is positively associated with local expenditure, though not significantly. (3) The rise of average housing price is also proven to reduce the local deficit significantly. (4) While the flypaper effect is obvious in Taiwan’s local expenditure, the opportunistic political business cycle theory is not so significant.

Elections, Heterogeneity of Central Bankers and Inflationary Pressure: The case for staggered terms for the president and the central banker

Abstract This paper analyzes a signaling model of monetary policy when inflation targets are not set by the monetary authority. The most important implication of the model’s solution is that a higher ex-ante dispersion in central bankers’ preferences, referred to as heterogeneity in policy orientation, increases the signaling cost of commitment to inflation targets. The model allows for a comparison of two distinct institutional arrangements regarding the tenure in office of the central banker and the head of government. We find that staggered terms yield superior equilibria when opportunistic political business cycles can arise from presidential elections. This is a consequence of a reduction of information asymmetry about monetary policy, and gives theoretic support to the observed practice of staggered terms among independent central banks.

SEARCHING FOR POLITICAL BUSINESS CYCLES IN TURKEY: FINDINGS FROM FISCAL POLICY

In this study Traditional Opportunistic Political Business Cycle Theory was tested for the Turkish economy using series of public expenditure, other public transfer expenditure, tax revenues and budget deficit for the period 1987-2002. The reason for the use of these variables in the analysis is that these variables have often been used in analyses for fiscal policy at the macroeconomic level in the literature of Traditional Opportunistic Political Business Cycle Theory. In the determination of whether or not political opportunistic policies were observed in general elections held in the 1987Q1-2002Q4 period, the “Seasonal Box-Jenkins Models” used by Alesina, Cohen and Roubini (1991, 1992) for OECD countries and industrial countries, was used in this study.

The Fed-induced political business cycle: Empirical evidence from a time–frequency view

Given that Nordhaus' political business cycle theory is relevant at election cycle frequency and that its validity can change over time, we conduct a wavelet analysis that is especially suited to test the theory. For the postwar U.S. economy, we harness wavelet methods to examine whether there actually exists an opportunistic political business cycle in monetary policy. Our results indicate an inclination of the Federal Reserve to cut the funds rate prior to presidential elections except for the 1990s. Such political manipulation is shown to significantly affect output in not only the famous Burns–Nixon era but also the Volcker–Reagan era. Moreover, central bank independence is shown to have relatively strengthened in the last three decades. The outcomes are robust even when the effects of government spending are controlled for. Further, we argue that it is likely that such evidence can be explained by changes in preferences of voters.

Political Business Cycle in Taiwan—Evidence from Central Government Expenditures

The political business cycle (PBC) refers to the phenomenon of an incumbent utilizing fiscal or monetary policies to create an economic boom before an election so that periodic fluctuations are induced according to election calendars. This article uses panel data from 1992 to 2010 to examine the effect of presidential elections on central government departmental expenditure in Taiwan. The results suggest an opportunistic PBC in Taiwan after the first Taiwanese presidential direct election in 1996. Furthermore, Taiwan’s government expenditure cycles have been significantly stronger in the years of the “new democracy.”

Pakistan, Politics and Political Business Cycles

This paper studies whether in Pakistan the dynamic behaviour of unemployment, inflation, budget deficit and real GDP growth is systematically affected by the timing of elections. We cover the period from 1973-2009. Our results can be summarised as follows: (1) Unemployment tends to be lower in pre-election periods and tends to increase immediately after elections, perhaps as a result of politically motivated employment schemes. (2) Inflation tends to be lower in pre-election periods, perhaps as a result of pre-electoral price regulation. (3) We find increase in the governmental budget deficit, financed by heavy government borrowings from the central bank and banking sector during election year. (4) Real GDP growth and real governmental investment growth declines during pre and post election terms possibly as a result of inefficient resource allocation. JEL Classification: D72, D78, H50, H61, E51 Keywords: Opportunistic Political Business Cycle, Fiscal Policy, Macroeconomics, Elections, Pakistan

Electoral Business Cycles in OECD Countries

Studies of Organisation for Economic Co-operation and Development (OECD) countries have generally failed to detect real economic expansions in preelection periods, casting doubt on the existence of opportunistic political business cycles. We develop a theory that predicts that a substantial portion of the economy experiences a real decline in the preelection period if the election is associated with sufficient policy uncertainty. In particular, policy uncertainty induces private actors to postpone investments with high costs of reversal. The resulting declines, which are called reverse electoral business cycles, require sufficient levels of polarization between major parties and electoral competitiveness. To test these predictions, we examine quarterly data on private fixed investment in ten OECD countries between 1975 and 2006. The results show that reverse electoral business cycles exist and as expected, depend on electoral competitiveness and partisan polarization. Moreover, simply by removing private fixed investment from gross domestic product, we uncover evidence of opportunistic cycles.

The political economy of the German Länder deficits: weak governments meet strong finance ministers

We analyse the deficits of the German Länder (regional states) for the period 1960 to 2005 and test a number of hypotheses derived from the literature on the political economy of public deficits. We find evidence for the weak government hypothesis, that is, coalition governments issue significantly more debt than single party governments – a result that is typically explained by the common pool problem. As our data suggest, this result crucially hinges on the position or strength of the finance minister within coalition governments. We find that coalition governments with a strong finance minister are – in terms of borrowing – not significantly different from single party governments. In addition, we find (weak) evidence for an opportunistic political business cycle. As borrowing is significantly lower in pre-election years it appears that German voters favour fiscal discipline. There is no evidence for partisan behaviour, so party ideology seems to play a negligible role.

Partisan Politics Theory and stock market performance: Evidence for Spain

ABSTRACTThis paper examines the influence of Spanish major political events on stock market performance by testing the empirical implications of the existing theories focused on the connection between politics and stock exchanges. On the one hand, our findings give support to the partisan politics theory, since stock returns behave differently depending on the political orientation of the government, not only on the day of the national election but also during their tenure of office. On the other hand, the analytical results demonstrate that there are no abnormal positive returns during the second half of the government's term, which contradicts the opportunistic political business cycle theory. Finally, according to Brown et al.'s (1988) Uncertain Information Hypothesis, volatility of stock returns is shown to increase following the arrival of unexpected information.

The limits and rewards of political opportunism: How electoral timing affects the outcome of currency crises

AbstractPoliticians are often assumed to be opportunistic. This article examines both whether there is a limit to this opportunism and whether voters reward policy makers for opportunistic behaviour. By looking at currency crisis situations, the article presents a graphic rational opportunistic political business cycle model in which incumbents face a tradeoff between their wish to signal competence and the economic constraints imposed by the crisis. It analyses how electoral incentives affect policy makers' management of currency crises and how this management in turn affects the subsequent election outcome. The empirical results of probit models with selection using a sample of 122 crises in 48 industrial and developing countries between 1983 and 2003 confirm the model's prediction that under certain circumstances some types of policy makers do indeed have incentives to deviate from optimal policy in the run‐up to elections – and that voters reward this behaviour by re‐electing policy makers who follow such strategies. However, there is a limit to the readiness to manipulate: when speculative pressure is too severe, incumbents no longer manipulate policy but implement the least painful policy option instead.

Exchange Rate Regime, Central Bank Independence, and Political Business Cycles in Brazil

This article examines policy consequences of electoral cycles and exchange rate regime choices in Brazil. The literature on opportunistic political business cycles maintains that governments adopt expansionary economic policies before elections to mobilize voters’ support. However, research findings in Latin America based on the theory has been inconclusive. I argue that the lack of conclusive evidence in Latin America stems from measurement errors common in the use of cross-national aggregate data. Using Brazil’s monthly data from 1985 to 2006, this article shows that there are electorally induced fiscal cycles under fixed and crawling peg exchange rate regimes and electorally induced monetary cycles under floating exchange rates only when the nation’s central bank is not independent. Indeed, accounting for Brazil’s unique economic contingencies and longitudinal variations in the de facto central bank independence, its public policy behavior remarkably resembles that of the more affluent, economically stable OECD countries.

Political Budget Cycles in Papua New Guinea

This paper assesses the presence of opportunistic electoral budget cycles in Papua New Guinea. Using quarterly time series data, a clear pattern emerges of pre-election manipulations of fiscal policy by incumbent governments, mainly in the form of increased development spending and overall primary expenditure, followed in some cases by retrenchment in post-election periods. These findings are consistent with the predictions of rational opportunistic political business cycle theory. It is noteworthy that revenue was not statistically significantly related to elections, either in the pre- or post-election period. In this regard, electoral swings in fiscal deficits reflect a preference for influencing expenditures rather than taxation.

HOW DO LONG-TERM INVESTORS "VOTE" IN DEVELOPING COUNTRY ELECTIONS?

Investment decision-making in developing countries has largely ignored the role that local electoral politics may play in either encouraging or discouraging long-term investment projects sponsored by foreign firms. Increase in developing country foreign direct investment on the one hand, and trends promoting democratization and competitive elections on the other hand provide an ideal research opportunity to investigate possible investment-election linkages. We do so through development and testing of a framework integrating partisan and opportunistic political business cycle (PBC) theories to predict trends in the count of major investment projects announced in 18 emerging-market countries holding 31 presidential elections from 1987-2000. Consistent with the framework, we find that firms sponsoring major project investments perceive lower investment risk in the form of more investment project announcements as left-wing political incumbents appear more likely to be replaced by right-wing challengers. Sim...

POLITICAL MONETARY CYCLES UNDER ALTERNATIVE INSTITUTIONS: THE INDEPENDENT TREASURY AND THE FEDERAL RESERVE

The theory of opportunistic political business cycles predicts incumbent politicians will alter their economic policies to spur short-run growth to attract additional votes for the upcoming election. There has not been much emphasis on the possibility of historical political business cycles prior to the Keynesian Revolution. No study has yet undertaken a systematic approach to testing for policy cycles during this period. Our study will bridge this gap by considering cycles in monetary policy for the periods of 1879–1914 until the start of Fed operations, and 1914–1932 until abandonment of the gold standard. To properly test for political cycles, it is necessary to develop reaction functions for the Treasury and compare against the reaction function later held by the Fed. This also reveals that creation of an independent monetary authority to be insulated from political pressures changed the manner in which policy was directed, aside from political issues. The evidence is not consistent, however, with monetary cycles closely tied to electoral concerns.

Counting the investor vote: political business cycle effects on sovereign bond spreads in developing countries

International business research has paid scant attention to whether and how electoral politics and economic policies affect foreign investment risk assessment, particularly in developing countries, where the last decade has seen both considerable foreign investment and domestic progress toward democratization and electoral competitiveness. We respond with development and testing of a framework using partisan and opportunistic political business cycle (PBC) theory to predict the investment risk perceived by investors holding sovereign bonds during 19 presidential elections in 12 developing countries from 1994 to 2000. Consistent with our framework, we find that bondholders perceive higher (lower) investment risk in the form of higher (lower) credit spreads on their sovereign bonds as right-wing (left-wing) political incumbents appear more likely to be replaced by left-wing (right-wing) challengers. For international business research, our findings illustrate the promise of PBC theory in explaining the election-period behavior of sovereign bondholders and, perhaps, other investors who also ‘vote’ in developing country elections and can substantially influence the price and availability of capital there. For developing country investors and states, our findings highlight the financial effects of democracy in action, and underscore the importance of state communication with investors during election periods.

Democracy's Spread: Elections and Sovereign Debt in Developing Countries

We use partisan and opportunistic political business cycle (PBC) considerations to develop and test a framework for explaining election-period changes in credit spreads for developing country sovereign bonds. Pre-election bond spread trends are significantly linked both to the partisan orientation of incumbents facing election and to expectations of incumbent victory. Bond spreads for right-wing (leftwing) incumbents increase (decrease) as the likelihood of left-wing (right-wing) challenger victory increases. For right-wing incumbent partisan and opportunistic PBC effects bondholder risk perceptions are mutually reinforcing. For left-wing incumbents partisan PBC effects dominate bondholder risk perceptions compared to opportunistic PBC effects.

Democratization's Risk Premium: Partisan and Opportunistic Political Business Cycle Effects on Sovereign Ratings in Developing Countries

We use partisan and opportunistic political business cycle considerations to develop a framework for explaining election-period decisions by credit rating agencies publishing developing country sovereign risk-ratings ratings. We test six hypotheses derived from the framework with 482 agency ratings for 19 countries holding 39 presidential elections from 1987-2000. We find that ratings are linked to the partisan orientation of incumbents facing election and to expectations of incumbent victory. Consistent with the framework, rating effects are sometimes greater for right-wing compared to left-wing incumbents, perhaps, because partisan PBC considerations with right-wing (left-wing) incumbents reinforce (counteract) opportunistic PBC considerations.

Political business cycles, democratization, and economic reform: the case of Africa

This paper presents cross-country evidence that political business cycles are alive and well in the nascent democracies of the developing world. Africa provides fertile ground for the study of political business cycles. This paper uncovers systematic electorally timed interventions in five monetary and four fiscal policy variables in a panel of African countries. These findings are consistent with the predictions of rational opportunistic political business cycle theory. If Africa's increasingly frequent elections are associated with reversals of fiscal and monetary policy reform, there is a potential conflict between political and economic reform.

A political business cycle with boundedly rational agents

This paper shows that being “rational” is not crucial for rational opportunistic political business cycle theory. Partisan and independent central banks initiate a political business cycle even if voters and central banks adapt to positive rewards. I consider a central bank that is independent but has party preferences. Voters prefer competence, but do not know the government's competence. Therefore, the central bank signals competence through an expansive monetary policy. The approach used is a simulation of artificial adaptive agents in an evolutionary programming setup. In contrast to a model with complete rationality, the convergence of the evolutionary path is not unique in the simulation. Political, non-political and non-equilibria (in a game theoretical sense) coexist. Coordination occurs frequently.