Paola Assael Felipe Larraín () (Instituto de Economía. Pontificia Universidad Católica de Chile.)
Abstract
In democracies, governments need to be elected, and this provides a powerful incentive for incumbents to use economic instruments around elections in order to influence the electorate. Political business cycle (PBC) theory predicts that governments will use monetary, fiscal, and exchange rate policy to improve economic conditions before elections and thus win more votes. This paper analyzes whether such a phenomenon has been present in Chile during the last 5O years, using both econometric methods and a careful observation of the different episodes. The results indicate the clear existence of a cycle around Presidential elections. There is evidence of especially expansionary policies before elections in every government from 1939 to 1989. Re clearest cases are monetary and exchange rate policies, but fiscal policy is also consistent with PBC theory. The PBC is also present in result variables such as GDP growth which shows a trend to increase before elections, but the evidence is statistically weaker than that for instruments. PBC is thus verified around Presidential elections, but we found no clear evidence of PBC at the time of Congressional elections. This may be due to the existence of a strong Presidential regime in Chile during the period under analysis. Another important fact is that Chile had no independent Central Bank before 1990; thus, monetary policy has probably become less responsive to the electoral cycle after this. We also hypothesize that the impossibility of Presidential reelection and a relatively short Presidential term are both factors that contribute to ameliorate the PBC.
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Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.
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