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Electoral Business Cycles in OECD Countries

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  • Canes-Wrone, Brandice

    (Princeton University)

  • Park, Jee-Kwang

    (Princeton University)

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    Abstract

    Studies of OECD countries have generally failed to detect real economic expansions in the pre-election period, casting doubt on the existence of opportunistic political business cycles. We develop a theory that predicts a substantial portion of the economy experiences a real decline in the pre-election period. Specifically, the political uncertainty created by elections induces private actors to postpone investments with high costs of reversal. The resulting declines, referred to as reverse electoral business cycles, are larger the more competitive the electoral race and the greater the polarization between major parties. We test these predictions using quarterly data on private fixed investment in ten OECD countries between 1975 and 2006. The results suggest that reverse electoral business cycles exist, and as expected, depend on electoral competitiveness and partisan polarization. Moreover, simply by removing private fixed investment from gross domestic product (GDP), we uncover robust evidence of opportunistic cycles.

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    File URL: http://www.princeton.edu/~bcwrone/RECsOECD.pdf
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    Bibliographic Info

    Paper provided by Princeton University, Research Program in Political Economy in its series Papers with number 9-12-2010a.

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    Date of creation: Sep 2010
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    Handle: RePEc:ecl:prirpe:9-12-2010a

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    1. Ernesto H. Stein & Jorge M. Streb, 1999. "Elections and the Timing of Devaluations," Research Department Publications 4164, Inter-American Development Bank, Research Department.
    2. Kevin Grier, 2008. "US presidential elections and real GDP growth, 1961–2004," Public Choice, Springer, vol. 135(3), pages 337-352, June.
    3. Pianta, Mario, 1995. "Technology and Growth in OECD Countries, 1970-1990," Cambridge Journal of Economics, Oxford University Press, vol. 19(1), pages 175-87, February.
    4. Ernesto H. Stein & Jeffry Frieden & Piero Ghezzi, 2000. "Politics and Exchange Rates: A Cross-Country Approach to Latin America," Research Department Publications 3119, Inter-American Development Bank, Research Department.
    5. David Stasavage, 2000. "Private Investment and Political Uncertainty," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 25, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    6. Block, Steven A. & Vaaler, Paul M., 2004. "The price of democracy: sovereign risk ratings, bond spreads and political business cycles in developing countries," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 917-946, October.
    7. Dani Rodrik, 1989. "Policy Uncertainty and Private Investment in Developing Countries," NBER Working Papers 2999, National Bureau of Economic Research, Inc.
    8. Garfinkel, Michelle R & Glazer, Amihai, 1994. "Does Electoral Uncertainty Cause Economic Fluctuations?," American Economic Review, American Economic Association, vol. 84(2), pages 169-73, May.
    9. Bruce Headey & Derek Headey, 2003. "German Reunification: Welfare Gains and Losses East and West," Social Indicators Research, Springer, vol. 64(1), pages 107-138, October.
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