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Dynamics of Political Budget Cycle

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  • Manjhi, Ganesh
  • Keswani Mehra, Meeta

Abstract

Using the method of optimal control, when an incumbent politician derives utility from voting support and dis-utility from budgetary deficit, the equilibrium time paths of both voting support and budgetary deficit are characterized in a finite time horizon under complete information. The incumbent politician may be an opportunist, in that she/ he is interested in garnering votes for herself/ himself, and manipulates budgetary deficit to achieve this, or else she/ he may be partisan, that is, characterized by heterogenous preferences, reflecting preferences for specific economic policies. The citizen-voters vote for the opportunist as well as the partisan incumbent. However, they reject the same when there is a sufficiently strong anti-incumbency in the opportunist case. The level of voting support obtained in case of both opportunist and partisan is found to be positive and rising over time, but running the budgetary deficit will be costlier for the economy in the former case than the latter. That is, per unit votes garnered by raising the budgetary deficit as compared to the benchmark deficit are lower when the incumbent is an opportunistic than when she/ he is partisan.

Suggested Citation

  • Manjhi, Ganesh & Keswani Mehra, Meeta, 2015. "Dynamics of Political Budget Cycle," MPRA Paper 68791, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68791
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    More about this item

    Keywords

    Opportunist Incumbent; Partisan Incumbent; Citizen Voters; Budgetary Deficit; Political Economy; Political Budget Cycles; Fiscal Policy; Anti-incumebency;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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