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Political Cycles in OECD Economies

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  • Alesina, Alberto F
  • Roubini, Nouriel

Abstract

This paper studies whether the dynamic behaviour of GNP growth, unemployment and inflation is systematically affected by the timing of elections and changes of government. The sample includes the last three decades in 18 OECD economies. We test explicitly the implications of several models of political cycles, both of the `opportunistic' and of the `partisan' type. Also, we confront the implications of recent `rational' models with more traditional approaches. Our results can be summarized as follows: (a) the `political business cycle' hypothesis, as formulated in Nordhaus (1975) on output and unemployment, is generally rejected by the data; with the exception of Japan, we also reject the extension of the `political business cycle' model, with endogenous timing of elections; (b) inflation tends to increase immediately after elections, perhaps as a result of pre- electoral expansionary monetary and fiscal policies; (c) we find evidence of temporary partisan differences in output and unemployment and of long-run partisan differences in the inflation rate as implied by the `rational partisan theory' (Alesina, 1987); (d) we find virtually no evidence of permanent partisan differences in output and unemployment.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 470.

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Date of creation: Oct 1990
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Handle: RePEc:cpr:ceprdp:470

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Keywords: Elections; Inflation; OECD; Output; Political Business Cycles;

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References

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  1. Steven M. Sheffrin, 1989. "Evaluating Rational Partisan Business Cycle Theory," Economics and Politics, Wiley Blackwell, vol. 1(3), pages 239-259, November.
  2. Olivier J. Blanchard & Lawrence H. Summers, 1987. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
  3. Terrones, M.E., 1989. "Macroeconomic Policy Cycles Under Alternative Electoral Structures," UWO Department of Economics Working Papers 8905, University of Western Ontario, Department of Economics.
  4. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  5. Mankiw, N. Gregory & Campbell, John, 1987. "Permanent and Transitory Components in Macroeconomic Fluctuations," Scholarly Articles 3207697, Harvard University Department of Economics.
  6. Hsiao,Cheng, 2003. "Analysis of Panel Data," Cambridge Books, Cambridge University Press, number 9780521818551, October.
  7. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 796-805, September.
  8. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
  9. Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, vol. 32(2-3), pages 542-550, March.
  10. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  11. Ito, Takatoshi, 1990. "The timing of elections and political business cycles in Japan," Journal of Asian Economics, Elsevier, vol. 1(1), pages 135-156.
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. Bhargava, Alok & Sargan, J D, 1983. "Estimating Dynamic Random Effects Models from Panel Data Covering Short Time Periods," Econometrica, Econometric Society, vol. 51(6), pages 1635-59, November.
  14. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November.
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