Political Credit Cycles - Myth or Reality?
37 Pages Posted: 9 Nov 2016
Date Written: November 7, 2016
This paper tests the existence of political credit cycles, the positive co-movement between credit and elections. While support for this relationship has been found in some single-country studies, the link between electoral cycles and credit expansion has seen little exploration at the multi-country level. Using a comprehensive data set covering bank and non-bank credit in 165 countries from 1960 to 2013, we show that both government and private credit significantly increase in election years. This suggests the possibility that politicians use not only fiscal and monetary policy to court voters, but also implement credit market policies such as interest rate subsidies and tax breaks for debt to enhance credit growth. However, we find that a higher degree of financial openness weakens the frequency and magnitude of political credit cycles; yet the conditional effect of financial openness may be offset under the presence of institutional constraints on monetary and fiscal policy. Our findings are robust to different model specifications.
Keywords: Political Credit Cycles, Elections, Credit Markets
JEL Classification: D72, F50, E51, E65
Suggested Citation: Suggested Citation