Political Business Cycle Theory Research Articles

행동과학의 렌즈로 재조명한 정치적 경기순환론

The political business cycle theory demonstrates that incumbent politicians opportunistically manipulate macroeconomic business cycles such as inflation or unemployment to further their chances of re-election. Since Nordhaus’s (1975) pioneering model on the topic, both economists and political sciences have long examined the interdependence of political and macroeconomic outcomes within various contexts. Notwithstanding the promise of the theory of political business cycle, less attention has been paid to its theoretical assumptions—voters’ formation of the image for the incumbent and the durational effect of political manipulation of macroeconomic variables. Drawing insights from behavioral science, this study examines how macroeconomic outcomes in the election year affect the percentage of votes in the next election year in the Korean local government contexts. Findings suggest that the assumptions of political business cycle theory need to be expanded to enhance its theoretical development and practical applications.

오스트리아학파 경기순환론에 대한 공공선택학파의 대응

Since Mises’ advocacy and Hayek’s refinement, ABCT(Austrian Business Cycle Theory) has been well formulated and showed valid explanation on actual economic business cycles as well. This article reveals how Public Choice responded to ABCT and how they developed its own ideas on business cycle. Gordon Tullock criticized Rothbardian sense of ABCT, followed by severe response from Sallerno. Some essential points on this argument were extracted to compare the basic difference of Tullock and Rothbard. ABCT activates business cycle when gov’t(central bank) ‘artificially’ lower the interest rate. Public Choice theorists focus on ‘why’ they do that. For ABCT, whether or not they have good intention is not important. PBCT, however, more emphasize that was done for the selfish political interests that politicians or bureaucrats have in political context. Austrians suggested new meaning to ‘bust’ phase of economic cycle, which under neo-classcical economics school long have been ignored as ‘bad’ event. ABCT assumes two key concepts; heterogeneity of capital, and mal-investment. PBCT is unfamiliar to those. So PBCT frequently does not identify the difference between over-investment and mal-investment, and assumes homogeneity of capital. It’s because Public Choice stands on neo-classical economics, not Austrian sense of economics. Then, four political business cycle theory(PBCT) models were reviewed: Opportunistic, Partisan, Rational Opportunistic, and Rational Partisan model. Austrians focusing on market process met Public Choice Theorists focusing political market met on the theme of business cycle. ABCT shows how ‘visible hand’ gives impact on market economy, and PBCT shows what impact business cycle has to political market. Each mutually gives sound tension, plus contributes to complementary explanation on overall business cycle.

Economics of Regaining Office: The Case of Pakistan (1947-2005)

Political business cycle (PBC) can be defined as fluctuations in the economy due to an attempt of a government to manipulate the economy prior to elections for favourable outcomes i.e. regaining its office. The concept of policy cycles gained a good deal of attention by the economists during mid 70s. Though most of the researchers attribute the PBC theory to Schumpeter (1939) and Kalecki (1943) but the seminal work in the theory of PBC is Nordhaus (1975).

Do Transnational Rating Agencies “Regulate” National Political Budget Cycles?

Regulatory theory assumes governments constrain undesirable behavior by firms, but the opposite could be true internationally. We show how with credit rating agencies (CRAs) and election-year government borrowing. Political business cycle theory implies that governments sometimes borrow excessively to retain office. Transnational regime theory implies that CRAs regulating global credit allocation can threaten borrowing governments with rating downgrades signaling poor economic stewardship to voters. Analyses of CRA ratings and government borrowing for 63 countries holding 109 elections from 2001-2011 indicate support for both implications: 1) governments increase election-year borrowing; 2) CRA rating downgrades increase government electoral defeat likelihoods; and 3) governments diminish excessive election-year borrowing when CRAs signal higher downgrade likelihoods. Such reverse “regulation” raises new issues for international business research, practice, and public policy.

The Effect of Presidential Particularism on Economic Well-Being: A County-Level Analysis

Does it pay to be a locale of political importance? Political business cycle theory predicts that the executive has an incentive to manipulate policy to increase the chances of their party remaining in office. In particular, core counties (those that vote for the current administration) have been shown to enjoy disproportionately higher federal spending. In this paper, we explore how this funding affects the well-being of an area by estimating the effect of presidential particularism on governmental transfers and (productive) income per-capita using county-level data from 1993 to 2012. We find that transfer payments tend to be higher and income lower in counties that vote for the current administration. These findings are robust across a wide number of specifications including fixed effects, first differences, a first differenced model with county-specific time trends, and a matching analysis. Moreover, results hold when examining the subset of counties that only voted for a single party throughout the entire sample where the treatment (whether the county voted for the current administration) is largely exogenous to the county in question.

Political business cycle and fiscal discipline in Sub-Saharan Africa

We tested the Political Business Cycle theory in Sub-Sahara Africa. To provide an empirical explanation for this nexus, this paper used unbalanced panel data from thirty-six (36) Sub-Saharan African countries between 1990 and 2018. The system Generalized Method of Moment (GMM) developed by Arrelano-Bover/Blundell-Bond was employed to analyze the collected data. The results of the system GMM revealed that the fiscal deficit is significantly large in election years and the deficit spending spills into the year after the election, though not as high as in the election year. We could not, however, find a significant effect in the pre-election year. In addition, we found evidence suggesting that though democracy significantly lowers the fiscal deficit, it promotes higher deficit spending in the election year and the year after the election. Hence, the study established the existence of a political business cycle in Sub-Saharan African countries. The study thus recommends that sound economic policies should be put in place to reduce the persistent deficit in SSA so as to maintain sustainable fiscal health, as well as the sustainability of macroeconomics, particularly enhanced industrialization, as the study found that countries' fiscal deficits are lower in more industrialized countries in the region.

The Effect of Presidential Particularism on Income: A County Level Analysis

Does it pay to be a locale of political importance? Political business cycle theory predicts that the executive has an incentive to manipulate policy to increase the chances of their party remaining in office. In particular, core counties (those that vote for the current administration) have been shown to enjoy disproportionately higher federal spending. In this paper, we explore how this funding affects the well-being of an area by estimating the effect of presidential particularism on governmental transfers and (productive) income per-capita using county-level data from 1993 – 2012. We find that transfer payments tend to be higher and income lower in counties that vote for the current administration. These findings are robust across a wide number of specifications including fixed effects, first differences, a first differenced model with county specific time trends, and a matching analysis. Moreover, results hold when examining the subset of counties that only voted for a single party throughout the entire sample where the treatment (whether the county voted for the current administration) is largely exogenous to the county in question.

The Applicability of Political Business Cycle Theories in Transition Economies

Abstract The paper focuses the applicability of political cycles theories in specific circumstances of economies in transition which are at the same time the new democracies. Economic and political transition in these countries change both people’s and politicians’ preferences, institutions and generate specific politically motivated misuse of economic policymaking. Theories of political cycles in macroeconomics have been developed since 1970s, when the fact that policymakers could use economic policy as an efficient tool for increasing their chances for reelection became obvious. In countries with parliamentary democracies, incentives of policymakers to influence election results could be opportunistically motivated (opportunistic models) or ideologically motivated (partisan models). On the other side, voters could be naïve or rational, with different economic outcomes, as argued in extensive political cycles literature. The paper studies specific political motives of politicians in transition economies which are faced, especially in first fazes of transition with weak institutional mechanism and rules, and naïve voters. Consequently, opportunistic motives dominate ideological ones. The paper also focuses how the development of the institutional environment, especially in the context of international integration, such as accession to the European Union, reflects on the political business cycles in these countries.

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.

The Political Business Cycle in Asian Countries

The political business cycle (PBC) theory argues that an incumbent party tends to use government resources to impress voters, so government spending always rises before but declines after an election. Many PBC studies have been done for an individual country or cross-countries, but the results are conflicting. The purpose of this paper is to explore possible fluctuating patterns of government spending in response to political elections in Asian countries because of a lack of studies across this region. In this study, data on 219 elections in 26 countries from 1990 to 2014 are collected. There are two main findings: firstly, government spending falls the year after elections in Asian countries; secondly, the degree of democracy and transparency have impacts on government spending in Asian countries.

The CIA's Democratic Integrity: Information Sharing and Electoral Accountability

Drawing from previous research on the political business cycle and principal-agent theory on executive and congressional oversight of information sharing, I analyze the Central Intelligence Agency’s (CIA) implementation of the Freedom of Information Act (FOIA) during presidential and congressional elections. I find that when the the incumbent president is democrat the CIA responds to FOIA requests approximately a month faster than when the incumbent president is a republican (p<0.20).

Political business cycles and construction licensing

AbstractWe analyze the effects of opportunistic and partisan politics on the licensing of construction activities, which in turn determines the level of housing supply. In line with Political Business Cycle theory, we hypothesize that the municipal incumbent may manipulate the supply of construction permits before (general and local) elections in order to boost economic activity and voter satisfaction, or to accommodate special‐interest groups. Our findings, based on time‐series data from post‐socialist Tirana (Albania), are consistent with opportunistic and partisan incentives’ creating cycle effects in the licensing of construction permits. However, we find that the direction of opportunistic election cycles depends critically on the interaction between the municipal incumbent and the central‐level government. Our paper raises important questions about the effects of transition politics on spatial development in post‐socialist cities.

Electoral cycles in MPs’ salaries: evidence from the German states

Members of parliament (MPs) often set their own salaries. Voters dislike self-serving politicians, and politicians are keen to please voters. In line with political business cycle theories, politicians thus may delay giving themselves a salary increase until after elections. We investigate electoral cycles in the salary increases of German state MPs. Using data for 15 states over the period 1980–2014, we find no evidence that increases in MP salaries are influenced by election cycles. Politicians can increase their salaries at any point during the legislative period without negative consequences. We posit that this may be because even those voters who are most disenchanted with politics likely understand that all politicians benefit from a salary increase and thus do not punish the governing party at the polls.

Cost of ruling: An examination of political business cycle, governmental accountability, and alternation in power in Ghana’s democracy

ABSTRACTGhana’s past is littered with frequent swapping of regimes and governments, but often these alternations in power were of the unconstitutional type, triggered by men in uniform. Since the introduction of democracy in 1992, however, the two main political parties, the National Democratic Congress (NDC) and the New Patriotic Party (NPP), have through competitive elections taken turns in ruling the country. While there are few salient issues that divide the two parties, no single variable predicts a winner, sealing the fate of a ruling party, more than the handling of the national economy. The goal of this study is to review two realities in political economy that often impact elections in industrialized democracies and determine the extent to which these are salient in Ghana’s electoral contests. These two realities are the popularity-function and the vote-function. In a typical election, voters consider the popularity of the incumbent party and how it performed on the economy when deciding to either reward it or throw it out of office (popularity-function). On the other hand, through the vote-function paradigm, an incumbent party pays a cost for ruling. Depending on the size of this mathematical constant, an incumbent party gets re-elected or rejected because it either kept faith with the electorate or failed to meet expectations. How does a ruling party react to these realities? Several studies have shown that incumbent parties in Ghana and other emerging democracies manipulate key economic variables in an election year to win over voters. While this is the general expectation of the Political Business Cycle theory, this article posits that a mediating factor—voter’s tribal affiliation—works to neutralize any “windfall of votes” expected from manipulating the economy. Thus, this study concludes that there is a consistent and stabilizing cost of ruling in Ghanaian politics, a development that points to early stages of a responsive and accountable political system.

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.

Electoral Cycles in MPs' Salaries: Evidence from the German States

Members of parliament (MPs) often decide on their own salaries. Voters dislike self-serving politicians, and politicians are keen to gratify their voters. In line with the political business cycle theories, politicians thus may well delay deciding on increases in salaries until after elections. We investigate electoral cycles in the salary increases of German state MPs. Using data for 15 states over the period 1980-2014, the results do not show that decisions on increases in MPs’ salaries were influenced by elections. In fact, MPs’ salaries increased by 0.30 to 0.37 percent when employees’ salaries increased by one percent. Politicians can increase their salaries at any point of time in the legislative period: understanding that all politicians benefit from an increase in salaries, voters may only be disenchanted with politics in general, without punishing individual incumbent parties.

Political Business Cycles and Partisan Politics: Evidence from a Developing Economy

This paper explores whether the evidence supports the Political Business Cycle (PBC) theory, Partisan Theory (PT), and Rational Partisan Theory (RPT) using stock market data from Turkey, a rapidly growing developing economy. The results indicate that the PBC hypothesis is not supported by the data. We find permanent partisan effects in the conditional variance but not in returns. The conditional volatility of the returns is higher during the periods in which a leftist party or a coalition government is in office. We also find that the stock market returns temporarily decreases (increases) at the beginning of a right-wing (left-wing) government, providing evidence in favor of RPT.

Political Business Cycles, Partisan Politics and the Effects of Political Events on the Stock Market: Evidence from a Developing Economy

This paper studies whether the evidence supports the political business cycle (PBC) theory, partisan theory (PT) and rational partisan theory (RPT) by using stock market data from Turkey, a rapidly growing developing economy. In addition, we examine the impact of political events on the returns and volatility of the stock market. Results indicate that the PBC hypothesis is rejected by the data. We find permanent partisan effects in the conditional variance but not in returns. The conditional volatility of the returns is higher during the periods in which a leftist party or a coalition government is in office. We also find that the stock market returns temporarily decreases (increases) at the beginning of a right-wing (left-wing) government, providing evidence in favor of RPT. Finally, analysis results show that political developments affect both the returns and the volatility of the stock market. The link between macroeconomic fundamentals and the stock market established by the existing literature implies that political developments have significant implications for the real economy.

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.