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Political Budget Forecast Cycles

Author

Listed:
  • Frank Bohn

    () (Radboud University, Institute for Management Research, Department of Economics)

  • Francisco José Veiga

    () (NIPE and Economics Department, University of Minho.)

Abstract

By forecasting overly optimistic revenues opportunistic governments can increase spending in order to appear more competent prior to elections. Ex post deficits emerge in election years, thereby producing political forecast cycles - as also found for US states in the empirical literature. In our theoretical moral hazard model we obtain three additional results which are tested with panel data for Portuguese municipalities. The extent of manipulations is reduced when (i) the winning margin is expected to widen; (ii) the incumbent is not re-running; and/or (iii) the share of informed voters (proxied by education) goes up.

Suggested Citation

  • Frank Bohn & Francisco José Veiga, 2019. "Political Budget Forecast Cycles," NIPE Working Papers 12/2019, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:12/2019
    as

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    References listed on IDEAS

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    19. repec:bla:ecopol:v:31:y:2019:i:1:p:43-70 is not listed on IDEAS
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    More about this item

    Keywords

    opportunistic political cycles; political budget cycles; revenue forecasts; deficit; transfers; asymmetric information; political economy.;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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