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Making rules credible: Divided government and political budget cycles

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  • Jorge M. Streb
  • Gustavo F. Torrens

Abstract

Political budget cycles (PBCs) result from the credibility problems that office-motivated incumbents face under asymmetric information, due to their temptation to manipulate fiscal policy to increase their electoral chances. We analyze the role of rules that limit debt, crucial for aggregate PBCs to take place. Since the budget process under separation of powers typically requires that the legislature authorize new debt, divided government can make these fisscal rules credible. Commitment is undermined either by unified government or by imperfect compliance with the budget law. When divided government affects efficiency, voters must trade off electoral distortions and government competence.

Suggested Citation

  • Jorge M. Streb & Gustavo F. Torrens, 2009. "Making rules credible: Divided government and political budget cycles," CEMA Working Papers: Serie Documentos de Trabajo. 395, Universidad del CEMA.
    • Handle: RePEc:cem:doctra:395
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    Cited by:

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    3. Jorge M. Streb & Daniel Lema & Pablo Garofalo, 2012. "Temporal aggregation in political budget cycles," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2012), pages 39-78, August.
    4. Jorge M. Streb & Gustavo Torrens, 2011. "La economía política de la política fiscal," CEMA Working Papers: Serie Documentos de Trabajo. 455, Universidad del CEMA.
    5. Jean-Jacques Tony Ekomie & Assoumou Ondo, 2019. "Political Budget Cycles: The Case of Gabon," Research in World Economy, Research in World Economy, Sciedu Press, vol. 10(1), pages 31-53, June.
    6. Pablo Garofalo & Daniel Lema & Jorge M. Streb, 2016. "Party alignment, political budget cycles and vote within a federal country," CEMA Working Papers: Serie Documentos de Trabajo. 601, Universidad del CEMA, revised May 2017.
    7. Kyriacou, Andreas P. & Okabe, Tomohito & 岡部, 智人 & Roca-Sagalés, Oriol, 2020. "Conditional Political Budget Cycles: A Reconsideration of the Role of Economic Development," Discussion Paper Series 709, Institute of Economic Research, Hitotsubashi University.
    8. Pablo Garofalo & Daniel Lema & Jorge M. Streb, 2020. "Political budget cycles and voting within a federal country: The influence of political alignment," Economics and Politics, Wiley Blackwell, vol. 32(2), pages 305-334, July.
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    12. Daniel Lema & Jorge M. Streb, 2013. "Ciclos electorales en política fiscal," CEMA Working Papers: Serie Documentos de Trabajo. 514, Universidad del CEMA.
    13. Yuan-Hong Ho & Chiung-Ju Huang, 2013. "Presidential Election, Checks and Balances, and Allocation of Public Expenditures in Taiwan," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 9(1), pages 31-53, January.
    14. Jorge M. Streb & Daniel Lema & Gustavo Torrens, 2009. "Checks and Balances on Political Budget Cycles: Cross‐Country Evidence," Kyklos, Wiley Blackwell, vol. 62(3), pages 426-447, August.
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    16. Jakob Haan & Jeroen Klomp, 2013. "Conditional political budget cycles: a review of recent evidence," Public Choice, Springer, vol. 157(3), pages 387-410, December.
    17. Andrew Q. Philips, 2016. "Seeing the forest through the trees: a meta-analysis of political budget cycles," Public Choice, Springer, vol. 168(3), pages 313-341, September.
    18. García, Israel & Hayo, Bernd, 2021. "Political budget cycles revisited: Testing the signalling process," European Journal of Political Economy, Elsevier, vol. 69(C).
    19. Andreas P. Kyriacou & Tomohito Okabe & Oriol Roca‐Sagalés, 2022. "Conditional political budget cycles: The role of time preference," Economics and Politics, Wiley Blackwell, vol. 34(1), pages 67-91, March.
    20. Liu, Liqun & Rettenmaier, Andrew J. & Saving, Thomas R. & Wang, Zijun, 2017. "The effects of trust fund surpluses on the rest of the federal budget," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 228-237.
    21. Jaaidane, Touria & Larribeau, Sophie, 2023. "The effects of inter-municipal cooperation and central grant allocation on the size of the French local public sector," European Journal of Political Economy, Elsevier, vol. 76(C).
    22. Touria Jaaidane & Sophie Larribeau, 2021. "When Cooperation tames the Leviathan and Partisan-distorted Grant Allocation feeds it: Evidence from French Municipalities," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2021-04, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    23. George Petrakos & Konstantinos Rontos & Luca Salvati & Chara Vavoura & Ioannis Vavouras, 2022. "Toward a political budget cycle? Unveiling long-term latent paths in Greece," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(5), pages 3379-3394, October.
    24. George Petrakos & Kostas Rontos & Luca Salvati & Chara Vavoura & Ioannis Vavouras, 2022. "Domestic vs. External Economic Sectors and the Political Process: Insights from Greece," Economies, MDPI, vol. 10(8), pages 1-13, August.

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    More about this item

    Keywords

    political budget cycles; discretion; unified government; rules; credibility; separation of powers; divided government;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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