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Natural Budget Deficit and Natural Political Cyclicality

Khani Hoolari, Seyed Morteza and Taghinejad Omran, Vahid (2017): Natural Budget Deficit and Natural Political Cyclicality.

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Abstract

In this paper we present a framework showing how governments use debt to flaunt competency and increase their votes and the chances of reelection; however, a cognitive bias, namely, the cyclist bias, would disrupt government’s computations. In this model the government’s budget deficit as well as changes in debt would be evaluated in a steady state. We show that debt is a double-edged sword and the more the government relies on debt to show its competency, the more the people understand the manipulations at work behind such measures. On equilibrium, due to cognitive bias in the behavior of individuals, the government will choose budget deficit which it is increasing, leading to the fall of the current incumbent and ultimately the opposition party would take over the power. The model can provide theoretical foundations for what the empirical study of Brender & Drazen (2008) concludes: expansive fiscal policies before elections won't increase reelection probability.

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