Purchase - $5.00

Conditional Political Budget Cycles

43 Pages Posted: 6 Jun 2002  

Min Shi

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Jakob Svensson

Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Date Written: April 2002

Abstract

This Paper uses a large new panel data set to examine the relationship between elections and fiscal policy. We find clear evidence of political business cycles in macroeconomic policy: spending increases before elections while revenues fall, leading to a larger deficit in election years. We also show that there are large systematic differences between developed and developing countries in the size and composition of the electoral policy cycles. We propose a moral hazard model of electoral competition to explain these differences. In the model, the sizes of the electoral budget cycles depend on the rents of remaining in power and the share of informed voters in the electorate. Using suitable proxies, we find that these institutional features explain a large part of the difference in policy cycles between developed and developing countries.

Keywords: Political budget cycles, dynamic panel estimation, developing countries

JEL Classification: D72, E62, P16, P26

Suggested Citation

Shi, Min and Svensson, Jakob, Conditional Political Budget Cycles (April 2002). CEPR Discussion Paper No. 3352. Available at SSRN: https://ssrn.com/abstract=315248

Min Shi (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-265-0574 (Phone)

Jakob Svensson

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 8 163 060 (Phone)
+46 8 161 443 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Paper statistics

Downloads
63
Rank
296,045
Abstract Views
2,425