Working Paper: NBER ID: w2428
Authors: Kenneth Rogoff
Abstract: Prior to elections, governments (at all levels) frequently undertake a consumption binge. Taxes are cut, transfers are raised, and government spending is distorted towards highly visible items. The "political business cycle" (better be thought of as "the political budget cycle") has been intensively examined, at least for the case of national elections. A number of proposals have been advanced for mitigating electoral cycles in fiscal policy. The present paper is the first effort to provide a fully-specified equilibrium framework for analyzing such proposals. A political budget cycle arises here via a multidimensional signaling process, in which incumbent leaders try to convince voters that they have recently been doing an excellent job in administering the government. Efforts to mitigate the cycle can easily prove counterproductive, either by impeding the transmission of information or by inducing politicians to select more costly ways of signaling. The model also indicates new directions for empirical research.
Keywords: Political Budget Cycles; Fiscal Policy; Elections
JEL Codes: D78; E62; H11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower taxes and higher government spending (H59) | voter perceptions (K16) |
| lower taxes and higher government spending (H59) | electoral outcomes (K16) |
| political budget cycles (H61) | welfare outcomes (I38) |
| information asymmetries (D82) | fiscal policy distortions (H31) |
| fiscal policy distortions (H31) | low taxes and high government consumption (H59) |