This paper examines whether there is a political budget cycle (PBC) in countries in the euro area. Using a multivariate model for the period 1999-2004 and various election indicators we find strong evidence that the Stability and Growth Pact has not restricted fiscal policy makers in the euro area in pursuing expansionary policies before elections. In an election-year – but not in the year prior to the election – the budget deficit increases. This result is in line with third generation PBC models, which are based on moral hazard. We also find a significant but small partisan effect on fiscal policy outcomes.
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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number
CESifo Working Paper No. 1532.
Find related papers by JEL classification: D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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