Business Cycles, Political Incentives and the Macroeconomy: Comparison of Models

Reichenvater, Arno (2007): Business Cycles, Political Incentives and the Macroeconomy: Comparison of Models. Published in: Electronic Publications of the University of Joensuu (May 2007)

Abstract

Politicians and political parties are faced with the problem of being elected into power, and later, of being re-elected. These political ambitions are often fuelled by policies that affect the entire economy and business cycles. The purpose of this paper is to compare the various models used to describe how political decision-making may affect business cycles. Both opportunistic and partisan models, and exchange rate manipulation are examined, and empirical evidence is used to view the validity of the models.

• Item Type: MPRA Paper
• Institution: University of Joensuu
• Language: English
• Keywords: business cycles; partisan models; opportunistic models; politics
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games

References

Abrams, R., Froyen, R. & Waud, R. (1980). Monetary Policy Reaction Functions, Consistent Expectations and the Burns Era. Journal of Money, Credit and Banking, Vol. 12, No. 1 (Feb., 1980), pp. 30-42.

Alesina, A. (1987). Macroeconomic Policy in a Two-Party System as a Repeated Game. The Quarterly Journal of Economics, Vol. 102, No. 3. (Aug., 1987), pp. 651-678.

Alesina, A. (1988). Credibility and Policy Convergence in a Two-Party System with Rational Voters. The American Economic Review, Vol. 78, No. 4. (Sep., 1988), pp. 796-805.

Alesina, A. & Roubini, N. (1992). Political Cycles in the OECD. The Review of Economic Studies, Vol. 59, No. 4. (Oct., 1992), pp. 663-688.

Alesina, A. & Sachs, J. (1988). Political Parties and the Business Cycle in the United States, 1948-1984. Journal of Money, Credit and Banking, Vol. 20, No. 1 (Feb., 1988), pp. 63-82.

Alesina, A., Roubini, N. & Cohen, G.D. (1997). Political Cycles and the Macroeconomy. Cambridge: MIT Press.

Barro, R. & Gordon, D. (1983). Rules, Discretion and Reputation in a Model of Monetary Policy. Journal of Monetary Economics, XII (Jul. 1983), pp. 101-122.

Beck, N. (1982). Parties, Administrations and American Macroeconomic Outcomes. American Political Science Review, Vol. 76, No. 1 (Mar., 1982), pp. 83-93.

Beck, N. (1984). Domestic Political Sources of American Monetary Policy: 1955-82. Journal of Politics, Vol. 46, No. 3 (Aug., 1984), pp. 786-817.

Carlsen, F. (1997a). Counterfiscal Policies and Partisan Politics: Evidence from Industrialized Countries. Applied Economics, Vol. 29, No. 2 (Feb., 1997), pp. 145-151.

Carlsen, F. (1997b). Opinion Polls and Political Business Cycles: Theory and Evidence for the United States. Public Choice, Vol. 92, No. 3-4 (Sept., 1997), pp. 387-406.

Cukierman, A. & Meltzer, A.H. (1986). A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information. Econometrica, Vol. 54, No. 5 (Sep., 1986), pp. 1099-1128.

De Long, J.B. Introduction to the Symposium on Business Cycles. Journal of Economic Perspectives, Vol. 13, No. 2 (Spring, 1999), pp. 19-22.

Dornbusch, R. (1987). Exchange Rate Economics: 1986. The Economic Journal, Vol. 97, No. 385. (Mar., 1987), pp. 1-18.

Galli, E. & Rossi, S.P.S. (2002). Political Business Cycles: The Case of the Western German Länder. Public Choice, Vol. 110, No. 3-4 (Mar., 2002), pp. 283-303.

Golden, D. & Poterba, J. (1980). The Price of Popularity: The Political Business Cycle Reexamined. American Journal of Political Science, XXIV (Nov., 1980), pp. 696-714.

Heckelman, J. (2001). The Econometrics of Rational Partisan Theory. Applied Economics, Vol. 33, No. 3 (Feb., 2001), pp. 417-426.

Heckelman, J. (2006). Another Look at the Evidence for Rational Partisan Cycles. Public Choice, Vol. 126, No. 3-4 (Mar., 2006), pp. 257-274.

Hibbs, D.A. (1977). Political Parties and Macroeconomic Policy. The American Political Science Review, Vol. 71, No.4 (Dec., 1977), pp. 1467-1487.

Hibbs, D.A. (1988). The American Political Economy: Electoral Policy and Macroeconomics in Contemporary America. Cambridge: Harvard University Press.

Kydland, F. & Prescott, E. (1977). Rules Rather than Discretion: The Inconsistency of Optimal Plans. Journal of Political Economy, LXXXV (Jun., 1977), pp. 473-491.

Lindbeck, A. (1976). Stabilization Policies in Open Economies with Endogenous Politicians. American Economic Review (Papers and Proceedings), Vol. 66, No. 2. (May, 1976), pp. 1-19.

McCallum, B. (1978). The Political Business Cycle: An Empirical Test. Southern Economic Journal, XLIV (Jan., 1978), pp. 504-515.

Nordhaus, W.D. (1975). The Political Business Cycle. The Review of Economic Studies, Vol. 42, No. 2 (Apr., 1975), pp. 169-190.

Paldam, M. (1979). Is There an Electional Cycle? A Comparative Study of National Accounts. The Scandinavian Journal of Economics, Vol. 81, No. 2, pp. 323-342.

Persson, T. & Tabellini, G. (1990). Macroeconomic Policy, Credibility and Politics. London: Harwood Economic Publishers.

Rogoff, K. & Sibert, A. (1988). Elections and Macroeconomic Policy Cycles. The Review of Economic Studies, Vol. 55, No. 1 (Jan., 1988), pp. 1-16.

Rogoff, K. (1990). Equilibrium Political Business Cycles. American Economics Review, Vol. 80, No. 1 (Mar., 1990), pp. 21-36.

Sheffrin, S. (1989). Evaluating Rational Partisan Business Cycle Theory. Economics and Politics, Vol. 1, No. 3 (Nov., 1989), pp. 239-259.

Veiga, L.G. & Veiga, F.J. (2007). Political Business Cycles at the Municipal Level. Public Choice, Vol. 131, No. 1-2 (Apr., 2007), pp. 45-64.

van der Ploeg, F. (1989). The Political Economy of Overvaluation. The Economic Journal, Vol. 99, No. 397. (Sep., 1989), pp. 850-855.