Working Paper: NBER ID: w1838
Authors: Kenneth Rogoff; Anne Sibert
Abstract: 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.
Keywords: Political Business Cycles; Macroeconomic Policy; Information Asymmetries
JEL Codes: E62; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Incumbent's competency signals (D83) | Voter expectations (D72) |
| Incumbent's competency signals (D83) | Policy decisions (D78) |
| Government's actions (H11) | Perceived competency (D83) |
| Information asymmetries (D82) | Strategic behavior by incumbents (L13) |
| Favorable information about competency (D83) | Less likelihood to cheat (C92) |
| Unfavorable information about competency (D83) | Increased temptation to manipulate policy (E60) |
| Incumbent's popularity (D72) | Cheating behavior (K42) |
| Incumbent's popularity + Low competency shock (D79) | Aggressive policy manipulation (E65) |