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Hyperbolic Memory Discounting and the Political Business Cycle

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  • T. Scott Findley

Abstract

The vintage political business cycle framework of Nordhaus (1975) represents the idea that the macroeconomic business cycle is manipulated opportunistically by an incumbent government to achieve re-election. A key assumption in this prototypical framework is that voters discount their memories about unemployment and inflation at a constant rate. Yet starting with Ebbinghaus (1885) and Jost (1897), a large body of research in psychology documents an empirical regularity that has come to be known as Jost’s Second Law of Forgetting - individuals discount recent memories at a higher rate compared to the rate at which they discount older memories. I find that incorporating this insight from psychology (i.e., hyperbolic memory discounting) into the benchmark framework moderates the amplitude of the predicted political business cycle.

Suggested Citation

  • T. Scott Findley, 2015. "Hyperbolic Memory Discounting and the Political Business Cycle," CESifo Working Paper Series 5556, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5556
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    More about this item

    Keywords

    hyperbolic memory discounting; Jost’s Second Law of Forgetting; political business cycle; inflation; unemployment;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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