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Using Real-Time Data to Test for Political Budget Cycles

We use real-time annual data on the fiscal balance, government current spending, current revenues and net capital outlays as published at a half yearly frequency in the OECD Economic Outlook for 25 OECD countries. For each fiscal year t we have a number of forecasts, a first release, and subsequent revisions. It turns out that revisions in the fiscal balance data are not affected by elections. However, we do find that governments spend more than reported before an election which provides support for moral-hazard type of political budget cycle (PBC) models: through hidden efforts the incumbent tries to enhance his perceived competence. We also find that governments had higher current receipts than reported before an election, which is in line with adverse-selection type of PBC models in which incumbents signal competence through expansionary fiscal policy before the elections.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 12-313.

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Length: 23 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:kof:wpskof:12-313
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  1. Shi, Min & Svensson, Jakob, 2006. "Political budget cycles: Do they differ across countries and why?," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1367-1389, September.
  2. Stephan, Andreas & Brück, Tilman, 2005. "Do Eurozone Countries Cheat with their Budget Deficit Forecasts?," Working Paper Series 2005,5, European University Viadrina Frankfurt (Oder), The Postgraduate Research Programme Capital Markets and Finance in the Enlarged Europe.
  3. Georgios Efthyvoulou, 2012. "Political budget cycles in the European Union and the impact of political pressures," Public Choice, Springer, vol. 153(3), pages 295-327, December.
  4. Cimadomo, Jacopo, 2011. "Real-time data and fiscal policy analysis: a survey of the literature," Working Paper Series 1408, European Central Bank.
  5. Min Shi & Jakob Svensson, 2003. "Political Budget Cycles: A Review of Recent Developments," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 29, pages 67-76.
  6. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
  7. Roel Beetsma & Massimo Giuliodori & Peter Wierts, 2009. "Planning to cheat: EU fiscal policy in real time," Economic Policy, CEPR;CES;MSH, vol. 24, pages 753-804, October.
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