Are there Political Budget Cycles in the Euro Area?
This article examines whether there is a political budget cycle (PBC) in countries in the euro area. Using a multivari ate model for 1999â€“2004 and various election indicators we find strong evidence that, since the start of the Stability and Growth Pact, fiscal policy-makers in the euro area have pursued expansionary policies before elections. In an elec tion year â€“ but not in the year prior to the election â€“ the budget deficit increases. This result is in line with third-generation PBC models, which are based on moral hazard. We also find a significant but small partisan effect on fiscal policy outcomes.
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