Elections and Macroeconomic Policy Cycles
There is an extensive empirical literature on political business cycles, but its theoretical foundations are grounded in pre-rational-expectations macroeconomic theory. Here the authors show that electoral cycles in taxes, government spending, and money growt h can be modeled as an equilibrium signaling process. The cycle is dr iven by temporary information asymmetries that can arise if, for exam ple, the government has more current information on its performance i n providing for national defense. Incumbents cheat least when their p rivate information is either extremely favorable or extremely unfavor able. An exogeneous increase in the incumbent party's popularity does not necessarily imply a damped policy cycle. Copyright 1988 by The Review of Economic Studies Limited.
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Volume (Year): 55 (1988)
Issue (Month): 1 (January)
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