Elections and Macroeconomic Policy Cycles
There is an extensive empirical literature on political business cycles, but its theoretical foundations are grounded in pre-rational expectations macroeconomic theory. Here we show that electoral cycles in taxes, government spending and money growth can be modeled as an equilibrium signaling process. The cycleis driven by temporary information asymmetries which can arise if, for example,the government has more current information on its performance in providing for national defense. Incumbents cheat least when their private informationis either extremely favorable or extremely unfavorable. An exogenous increase in the incumbent partyts popularity does not necessarily imply a damped policy cycle.
|Date of creation:||Feb 1986|
|Date of revision:|
|Publication status:||published as Rogoff, Kenneth and Anne Sibert. "Elections and Macroeconomic Policy Cycles." From Review of Economic Studies, Vol. LV (55), No. 181, pp. 1-16, January 1988.|
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