Working Paper: CEPR ID: DP470
Authors: Alberto Alesina; Nouriel Roubini
Abstract: This paper studies whether the dynamic behaviour of GNP growth, unemployment and inflation is systematically affected by the timing of elections and changes of government. The sample includes the last three decades in 18 OECD economies. We test explicitly the implications of several models of political cycles, both of the `opportunistic' and of the `partisan' type. Also, we confront the implications of recent `rational' models with more traditional approaches. Our results can be summarized as follows: (a) the `political business cycle' hypothesis, as formulated in Nordhaus (1975) on output and unemployment, is generally rejected by the data; with the exception of Japan, we also reject the extension of the `political business cycle' model, with endogenous timing of elections; (b) inflation tends to increase immediately after elections, perhaps as a result of pre- electoral expansionary monetary and fiscal policies; (c) we find evidence of temporary partisan differences in output and unemployment and of long-run partisan differences in the inflation rate as implied by the `rational partisan theory' (Alesina, 1987); (d) we find virtually no evidence of permanent partisan differences in output and unemployment.
Keywords: political business cycles
JEL Codes: D72; E32; H11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| electoral events (K16) | inflation (E31) |
| political business cycle hypothesis (D72) | output growth/unemployment (E24) |
| left-wing governments (P26) | output (C67) |
| inflation expectations (E31) | natural rate of growth (O40) |
| partisan differences (D72) | inflation rates (E31) |