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Politics, political competition and the political budget cycle in Canada, 1870 - 2000: a search across alternative fiscal instruments

In this paper Engel-Granger time series methodology is used to combine trending economic variables with stationary political factors to search for well-defined political influences on central government budgets in Canada over the entire post-Confederation time period from 1870 to 2000. To motivate such an inquiry we first investigate and find evidence of partisan political influence on Canada’s macro aggregates. However, because politics can influence economic outcomes only if there is a transmission mechanism through actual public policy choices, our finding of cycles in real output growth begs the question of whether such cycles arise through fiscal policy. Our analysis of three main fiscal policy instruments - public non-interest expenditure, taxation and the deficit net of interest - gives little support to any current political theory of public budgets, but does support the hypothesis that the degree of political competition matters for policy choices in both the long and short run. This new channel for the influence of politics on economic policy has not previously been isolated empirically in Canada and poses new questions in trying to reconcile the previous mixed results with respect to the influence of politics on economic aggregates.

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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 06-05.

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Length: 43 pages
Date of creation: 08 Aug 2006
Date of revision:
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:06-05
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  1. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
  2. Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2005. "Electoral Uncertainty, Fiscal Policy and Macroeconomic Fluctuations," CESifo Working Paper Series 1593, CESifo Group Munich.
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  8. Kneebone, R.D. & McKenzie, K.J., 1998. "Electoral and Partisan Cycles in Fiscal Policy: an Examination of Canadian Provinces," Papers 98-06, Calgary - Department of Economics.
  9. J. Stephen Ferris & Soo-Bin Park & Stanley L. Winer, 2005. "Political Competition and Convergence to Fundamentals: With Application to the Politcal Business Cycle and the Size of the Public Sector," Carleton Economic Papers 05-09, Carleton University, Department of Economics.
  10. Block, Steven A., 2002. "Political business cycles, democratization, and economic reform: the case of Africa," Journal of Development Economics, Elsevier, vol. 67(1), pages 205-228, February.
  11. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  12. Heckelman, Jac C, 2002. " Electoral Uncertainty and the Macroeconomy: The Evidence from Canada," Public Choice, Springer, vol. 113(1-2), pages 179-89, October.
  13. Besley, Timothy & Persson, Torsten & Sturm, Daniel, 2006. "Political Competition and Economic Performance: Theory and Evidence from the United States," Discussion Papers in Economics 769, University of Munich, Department of Economics.
  14. Andrikopoulos, Andreas A. & Prodromidis, Kyprianos P. & Serletis, Apostolos, 1998. "Electoral and Partisan Cycle Regularities: A Cointegration Test," Journal of Policy Modeling, Elsevier, vol. 20(2), pages 119-140, April.
  15. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August.
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  17. Stanley L. Winer, 1986. "The Role of Exchange Rate Flexibility in the International Transmission of Inflation in Long and Shorter Runs: Canada, 1953 to 1981," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 62-86, February.
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  22. J Stephen Ferris & Soo-Bin Park & Stanley L. Winer, 2006. "Political Competition and Convergence to Fundamentals: With Application to the Political Business Cycle and the Size of Government," CESifo Working Paper Series 1646, CESifo Group Munich.
  23. Dennis Mueller & Peter Murrell, 1986. "Interest groups and the size of government," Public Choice, Springer, vol. 48(2), pages 125-145, January.
  24. Schuknecht, Ludger, 1996. "Political Business Cycles and Fiscal Policies in Developing Countries," Kyklos, Wiley Blackwell, vol. 49(2), pages 155-70.
  25. repec:cup:cbooks:9780521021807 is not listed on IDEAS
  26. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
  27. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  28. James Kau & Paul Rubin, 1981. "The size of government," Public Choice, Springer, vol. 37(2), pages 261-274, January.
  29. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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