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Political forecast cycles

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  • Bohn, Frank
  • Veiga, Francisco José

Abstract

A moral hazard model is used to show why overly optimistic revenue forecasts prior to elections can be optimal: Opportunistic governments can increase spending and appear more competent; ex post deficits emerge in election years, thereby producing political forecast cycles – as also found for US states in the empirical literature. Additionally, we obtain three theoretical results which are tested with panel data for Portuguese municipalities. The extent of manipulations is reduced when (i) the winning margin is expected to widen; (ii) the incumbent is not re-running; and/or (iii) the share of informed voters (proxied by education) goes up.

Suggested Citation

  • Bohn, Frank & Veiga, Francisco José, 2021. "Political forecast cycles," European Journal of Political Economy, Elsevier, vol. 66(C).
  • Handle: RePEc:eee:poleco:v:66:y:2021:i:c:s0176268020300823
    DOI: 10.1016/j.ejpoleco.2020.101934
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    References listed on IDEAS

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    Cited by:

    1. Florian Brugger & Jörn Kleinert, 2019. "The strong increase of Austrian government debt in the Kreisky era: Austro-Keynesianism or just stubborn forecast errors?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(2), pages 229-248, May.
    2. Davide Cipullo & André Reslow, 2021. "Electoral Cycles in Macroeconomic Forecasts," CESifo Working Paper Series 9088, CESifo.

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    More about this item

    Keywords

    Opportunistic political budget cycles; Deficit; Revenue forecasts; Forecast errors; Asymmetric information; Political economy;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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