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Separation of Powers and Political Budget Cycles

  • Jorge M. Streb
  • Alejandro Saporiti

From a theoretical viewpoint, political budget cycles (PBC) arise in equilibrium when rational voters are imperfectly informed about the incumbent's competency and the incumbent enjoys discretionary power over the budget. This paper focuses on the second condition, examining how executive discretion is affected by the budgetary process under separation of powers. We specifically model PBC in the composition of government spending. The main result is that effective checks and balances in the budgetary process curb PBC. The institutional features of the executive-legislature bargaining game, namely, the actual agenda-setting authority, the status quo location and the degree of legislative oversight and control of the implementation of the budgetary law, play critical roles for the existence and the size of PBC. These results are consistent with recent empirical findings, which show that PBC are more pronounced in developing countries, where there are also less effective checks and balances.

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Paper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 251.

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Date of creation: Nov 2003
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Handle: RePEc:cem:doctra:251
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  1. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
  2. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
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  12. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
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  15. Brender, Adi & Drazen, Allan, 2005. "Political budget cycles in new versus established democracies," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1271-1295, October.
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  17. Lohmann, Susanne, 1998. "Institutional Checks and Balances and the Political Control of the Money Supply," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 360-77, July.
  18. Brender, Adi & Drazen, Allan, 2003. "Where Does the Political Budget Cycle Really Come From?," CEPR Discussion Papers 4049, C.E.P.R. Discussion Papers.
  19. Schuknecht, Ludger, 1998. "Fiscal policy cycles and public expenditure in developing countries," WTO Staff Working Papers ERAD-98-06, World Trade Organization (WTO), Economic Research and Statistics Division.
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