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Equilibrium Political Budget Cycles

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  • Kenneth Rogoff

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2428.

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Date of creation: Nov 1987
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Publication status: published as The American Economic Review, Vol. 80, No. 1, pp. 21-36, (March 1990).
Handle: RePEc:nbr:nberwo:2428

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  1. Keech, William R. & Simon, Carl P., 1985. "Electoral and welfare consequences of political manipulation of the economy," Journal of Economic Behavior & Organization, Elsevier, vol. 6(2), pages 177-202, June.
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