Equilibrium Political Budget Cycles

39 Pages Posted: 6 Apr 2007 Last revised: 22 Aug 2010

See all articles by Kenneth Rogoff

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 1987

Abstract

Prior to elections, governments (at all levels) frequently undertake a consumption binge. Taxes are cut, transfers are raised, and government spending is distorted towards highly visible items. The "political business cycle" (better be thought of as "the political budget cycle") has been intensively examined, at least for the case of national elections. A number of proposals have been advanced for mitigating electoral cycles in fiscal policy. The present paper is the first effort to provide a fully-specified equilibrium framework for analyzing such proposals. A political budget cycle arises here via a multidimensional signaling process, in which incumbent leaders try to convince voters that they have recently been doing an excellent job in administering the government. Efforts to mitigate the cycle can easily prove counterproductive, either by impeding the transmission of information or by inducing politicians to select more costly ways of signaling. The model also indicates new directions for empirical research.

Suggested Citation

Rogoff, Kenneth S., Equilibrium Political Budget Cycles (November 1987). NBER Working Paper No. w2428. Available at SSRN: https://ssrn.com/abstract=977824

Kenneth S. Rogoff (Contact Author)

Harvard University - Department of Economics ( email )

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