The Political Business Cycle After 25 Years

The National Bureau of Economic Research
The Political Business Cycle after 25 Years

Author(s): Allan Drazen
Source: NBER Macroeconomics Annual, Vol. 15 (2000), pp. 75-117
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/3585387 .
Accessed: 06/11/2014 05:21
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp
.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.
The University of Chicago Press and The National Bureau of Economic Research are collaborating with
JSTOR to digitize, preserve and extend access to NBER Macroeconomics Annual.
http://www.jstor.org
This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

All use subject to JSTOR Terms and Conditions
AllanDrazen
UNIVERSITY OF MARYLAND, HEBREW UNIVERSITY OF JERUSALEM,
AND NBER
Business
ThePolitical
Cycle
25 Years
after
1. Introduction
A quarterof a centuryhas passed sincethe initialoutburstof formal
and empiricalworkon politicalbusinesscycles,thatis, on
theoretical
determinants
ofmacroeconomic
political
cycles.On theempiricalside,
therewas Kramer's(1971)influential
of
studyofeconomicdeterminants
the
work
and
followed
of
Tufte
U.S. congressional
(1975,1978)
voting,
by
Fair(1978).1Nordhaus's(1975)pioneeringformalmodelofthepolitical
businesscycle(PBC) due toopportunistic
was
pre-electoral
manipulation
Soon
Hibbs
after,
(1977)prepublishedexactlytwenty-five
yearsago.2
senteda modelof partisanpolicymakers
(thatis, policymakers
having
different
macroeconomic
similarto thatofthe
goals) in an environment
were the key driving
Nordhaus,but wherethesepartisandifferences
force.Perhapsas influential
instimulating
research
was the1972Presidentialelectionin theUnitedStates,inwhichincumbent
RichardNixonwas
viewed
as
in
justifiably
engaging significant
pre-electoral
manipulation.3
I wishto thankmydiscussants,
AlbertoAlesina,CarlWalsh,and conference
participants
and seminarparticipants
at theHebrewUniversity
ofJerusalem
and theBankofIsraelfor
and StefanHubrichforextraordinarily
able researchassistanceand
helpfulcomments,
manyveryusefuldiscussions.Thisresearchwas supportedin partby theMauriceFalk
Institute
forEconomicResearch,HebrewUniversity
ofJerusalem.
1. Earlyworkon connections
betweenpoliticsand fluctuations
in economicactivity
is
reviewedin Kramer(1971).
2. Kalecki(1943)presentedan earlyexplicitmodel of the PBC; the politicalnatureof
was recognizedby Schumpeter
economicfluctuations
(1939)in his studyofbusiness
withNordhaus,Lindbeck(1976)presenteda similaridea; soon
cycles.Simultaneously
McRae(1977)also presenteda formal
modelofthePBC.
after,
3. Rogoff(1988)called Nixon"theall-timeheroofpoliticalbusinesscycles,"at least in
U.S. history.
Tufte(1978)beginshis famousbook on the PBC witha
contemporary
is notsupporteda hundredth
quotationfrom1814,"A Government
partso muchbythe

76 - DRAZEN
Subsequent to thisflurryof research,therehas been a large amount of
furtherwork. Theoreticalresearchhas concentratedon makingboth opportunisticand partisan models consistentwith voters behaving rationally,both in formingexpectationsabout futurepolicy and in votingon
thebasis ofthose expectations.The success ofopportunisticpre-electoral
manipulationwas rationalizedby assuming thatthereis imperfectinformation about an incumbent'scompetence,with expansionarypolicy beforean electiontaken as an indicatorof high competence,as in the pioneeringwork ofRogoff(1990) and Rogoffand Sibert(1988), and in papers
thatfollowed. A partisanpostelectoralcyclewas argued to be consistent
with rationalexpectationsin the importantworkby Alesina (1987, 1988).
On the empiricalside therehas been extensivework testingthe original
and subsequent models, and more generally,looking forempiricalevidence of political determinantsof business-cycle activity.In his NBER
Annualpaper in 1988,Alesina presentedan excellentsumMacroeconomics
the work up to thattime.
of
much
of
mary
It is over a decade since Alesina's paper was published. It now seems
like a good time to look at the past twenty-fiveyears of work and to
evaluate the state of the literature.What is our currentstate of understandingof the PBC, both theoreticallyand empirically?On what points
is thereagreementand on what points is therestillsignificantdisagreement? How well do the models explain the data? What does existing
theoryas well as data suggest about directionsforfutureresearch?
The short answer to these questions is that we have learned quite a
bit,with agreementon a number of issues, but stillsignificantdisagreement on others. On the empirical side, there are a number of clear
electoral effectson macroeconomicvariables. However, at least forthe
opportunisticmodel in developed countries, there is much less hard
evidence than both the theoreticalmodels and the conventionalwisdom
about the prevalence of "election-yeareconomics" would suggest. Although there is wide (but not universal) agreementthat aggregate economic conditions affectelection outcomes in the United States, there is
significantdisagreementabout whetherthereis opportunisticmanipulation that can be observed in the macro data. There is a clear partisan
effectin the United States (as well as in some other countries), with
economic activitybeing lower in the firstpart of Republican than Democraticadministrations,but stilldisagreementabout the underlyingdriving mechanisms. On the theoreticalside, many of the leading models
have been criticized for implausibilityof key assumptions. Two key
constant,uniform,quiet prosperityof the countryas by those damned spurtswhich Pitt
used to have just in the nick of time."

ThePolitical
Business
25 Years 77
Cycleafter
?
points, as I will discuss below, are: first,the assumption of seemingly
irrationalbehaviorby the public in some of the models; and, second, the
reliance on monetarysurprisesas the drivingforce.
The purpose of this paper is twofold: firstto present a short review
and criticalassessment of the existingliterature,both opportunisticand
partisan models, the principal aim being to point out what we know
empiricallyand to what extent existing models explain the empirical
regularities.A principal conclusion is that models based on manipulating the economy via monetarypolicy are unconvincingboth theoretically and empirically,while explanationsbased on fiscalpolicy conform
much better to the data and form a strongerbasis for a convincing
theoreticalmodel of electoral effectson economic outcomes. Second, I
presenta new model ofpoliticalcyclesbased on Rogoff's(1990) model of
politicalbudget cycles,extended to include monetarypolicy.The model
is the firstto incorporateboth monetaryand fiscalpolicy in a rational
opportunisticframeworkwith separate monetaryand fiscalauthorities.4
This separation of monetarypolicy fromthe direct control of elected
officialsis crucialfora number of reasons. It is both in sharp contrastto
realisticthan the policyexistingPBC models and farmore institutionally
makingstructurein those models. Moreover,it is crucialto the natureof
the electoralcycle,which depends on the interactionbetween the incumbent politicianwho can influencefiscalpolicy and an independent centralbank thatcontrolsmonetaryaggregates and interestrates,but may
be pressured to accommodate fiscalshocks. We also present some nonparametricempiricalevidence in favoroftheactive-fiscal,
passive-monetary
(AFPM) model of the opportunisticPBC.
The roadmap forthe paper is as follows. In the nextsection I quickly
review the opportunisticPBC model based on expansionarymonetary
shocks and present a conceptual assessment. In Section 3 the empirical
work on thisapproach is summarized. In Section4 I1move on to partisan
models driven by monetarypolicy,both the original Hibbs model and
Alesina's rationalpartisanmodel. In Section 5 the empiricalevidence on
partisan effectson macroeconomicoutcomes is reviewed. In Section 6, I
sum up what I consider to be the conceptual and empirical problems
with monetary-basedPBC models and present evidence in favor of a
fiscal-basedmodel. In Section 7 recentwork on fiscalcycles in developing countriesis summarized,both theoreticalextensionsof the political
budget-cyclemodel of Rogoff(1990), and empirical results supporting
the importanceof fiscalinfluencesin politicalbusiness cycles in a wide
4. Rogoffand Sibert(1988) present a model of fiscal-basedPBC with inflationeffects,but
where both tax and inflationpolicy are chosen by a single authority.

78*DRAZEN
rangeofcountries.In Section8, twocentralquestionsrelatedto a fiscalbased PBC modelare posed; theanswerspresentedmotivatetheAFPM
fiscalpolicy
model of Section9, which combineselection-influenced
withaccommodating
monetarypolicy.In Section10, I take a look at
some data forthe UnitedStates thatare consistentwith the AFPM
model,and I presentconcludingcomments.
2. TheMonetary
Model
Opportunistic
Beginningwith Nordhaus's (1975) model, earlymodels of the PBC,
or partisan,were based on monetarypolicyas
whetheropportunistic
the drivingforce.Expansionarymonetarypolicyled to a temporary
followedwith a lag, by an increasein
increasein economicactivity,
as well
inflation.Models differedin the motivationof policymakers,
led to
and thesedifferences
as in themodelingofexpectation
formation,
induced
economic
of
different
Nonetheless,
cycles.
types politically
very
models as a groupin assessing
it is usefulto reviewmonetary-based
theirsuccessin explaininga PBC. All are based on some variantof a
the polone equation representing
basic three-equation
framework,
between
the
relation
one
changesin the
giving
icymaker'sobjective,
on theone handand economicactivity
rateofmoneygrowthorinflation
how expectaone specifying
on theother(a Phillipscurve),and finally,
tions of inflationare formed.We begin witha briefreviewof these
models,briefbecausewe simplywanttopointoutsomeoftheirtheoretiand to summarizeempiricaltestsof theirabilityto
cal shortcomings
business
cycles.Thisreview,containedin Sections2, 3,
explainpolitical
on
based
4, and 5, is
Chapter7 ofDrazen (2000a),wherea fullertreatmentmaybe found.
MODEL
2.1 NORDHAUS'SOPPORTUNISTIC
Nodhaus's modelwas meantto show thatifvotingwerebased on ecowere
ofinflation
intherecentpastand ifexpectations
nomicperformance
whocontrolled
incumbent
an opportunistic
monetary
backward-looking,
cycle
policywould finditoptimalto inducean inflation-unemployment
an
a
boom
before
with
his
of
the
to
term,
just
length
corresponding
electionand a recessionafterwards.
The structureof the economyis summarizedby a nonstochastic,
tradePhillipscurve,yieldingan inflation-output
expectations-adjusted
off.
Xt =
'Tt
eTM-
(1)
tI
1T,

Business
25 Years 79
ThePolitical
Cycleafter
?
wherextis thedeviationofactualfrompotentialoutputand wherethe

rateiri.5
is assumedto controltheinflation
authority
monetary
ofreis to maximizehis probability
The objectiveofthepolicymaker
inthatitdependson economic
election.Votingbehavioris retrospective,
in thepast. Economicperformance
in
undertheincumbent
performance
and unemployment,
so
a periodis measuredbythebehaviorofinflation
in any period can be represented
thatvoterdissatisfaction
by a loss
function
oftheform
- )2 (t -
~2, = C (x,
2
2(2)
2
5 is thetargetrateof
whereiris theelectorate'stargetrateofinflation,
economicactivity(relativeto potentialoutput),and a is the relative
relativeto inflation
weightthe electorateputs on outputfluctuations
An opportunistic
will
the policythat
fluctuations.
choose
policymaker
attractsmostvoters,so thattheseparameterscould be thoughtof as
thepreferences
ofthemedianvoter.
representing
In thebasicmodel,one thenpositsa retrospective
for
votingfunction
an electionat theend ofperiodt,oftheform:
N,= N
s=O
8sSts +Et,
(2a)
yieldingthe numberof votes Nt as a functionof voters'swell-being,

< 0. Theexogenouslengthoftimebetweenelectionsis T + 1
where
N'(.)
<
0
withwhichvotersdiscountpasteconomic
periods, 8 < 1 is thefactor
and Etis a mean-zerostochas(a "forgetfulness
coefficient"),
performance
tictermrelatingeconomicperformance
to electoraloutcomes.The electoralmechanismis notmade morespecific.The standardopportunistic
PBC model assumesthat8 is small,in the sense thatrecenteconomic
countsfarmoreheavilyin influencing
voterchoicesthan
performance
economicperformance
in themoredistantpast. The stochastic
element
is added to allowforthepossibility
ofan incumbent
the
election.
losing
To close the model one mustspecifythe formation
of expectations.
5. In orderto reproducetheregularity
ofhighinflation
laggingthemonetary
expansion,
one mustdecouplemoneygrowthand inflation.
A simpleassumption
alongtheselines
is thatinflation
reflects
moneygrowthin thepreviousperiod,thatis, r, =-U,_,, withp,
controlvariable,and withthedivergence
ofactualfrom
beingthemonetary
authority's
betweentheactualrateofmoneygrowth
potentialoutputdependingon thedifference
and theeconomy-wide
expectedrateofmoneygrowthpA.See Chapter7.3 ofDrazen
(2000a)forprecisedetails.

80 DRAZEN
Crucialto the main resultsof the Nordhausmodel is some formof
A standardformulation
ofadaptiveinflation
exadaptiveexpectations.
is:
pectations
IT=
e-_1
+
"+0(,t-1
"/'-t-Ir),
(3)
the speed with

between0 and 1 representing
where 0 is a coefficient
Whatis crucialin theformawhichexpectations
adapt to past inflation.
tion of expectationsis thatwrdoes notdepend on the expectationof
arenotrational.Itis thischaracterisfuturepolicies,so thatexpectations
betweenperitic(combinedwiththeabsenceofany otherconnections
ods) whichgives the incumbentpolicymakeran exploitabletrade-off
in the attemptto affectelection
betweeninflationand unemployment
outcomes.
in two
Voterbehaviorin the Nordhausmodel is backward-looking
and exdimensions:votingdepends on past incumbentperformance,
pectationsof moneygrowthdepend onlyon past inflationrates.The
incumbentpolicymakerelected at t-3 chooses inflationrates r7Tt_, t-2,
and irtto maximizehis expectedvote in the nextelection.This

who wish
behaviorofincumbents
yieldsthefollowing
simple
in office.Immediately
ofremaining
to maximizetheprobability
precedvia
stimulates
the
the
an
election
economy
expansiongovernment
ing
arymonetarypolicy.The levels of monetaryexpansionand economic
in an electionperiod
are thosethatmaximizevotersatisfaction
activity
afterthe election,the governtakenalone. In the periodimmediately
monementreversescourse.It engineersa recessionvia contractionary
The
incumbent
down
to
expectations.
inflationary
tarypolicy bring
keeps economicactivitylow to keep expectedinflationlow untilthe
beforethe next election,so thata given rate of
period immediately
economicexpansion(inducedby a monetarysurprise)can be obtained
In thenextelectioncycle,thesame
low rateofinflation.
at a relatively
behavioris repeated.Hence, we have a simpleexamplein whichthe
combinedwith
of re-election,
the probability
possibilityof influencing
of the economy,yieldsa cyclein economicactivity.
the structure
[The
oftheNordhausmodel,
exactsolutionmaybe foundin any treatment
forexample,Drazen (2000a,p. 233-236).]
Srt_1, structure
2.2 CONCEPTUAL
CRITIQUE
There are threegeneralconceptualcriticismsof the basic Nordhaus
modelas a toolforexplaininga PBC. First,itassumesthatthepresident
withthe
controlsmonetarypolicy,an assumptionthatis inconsistent
observers
some
Reserve.
Federal
the
of
argue
Although
independence

ThePolitical
Business
25 Years 81
Cycleafter
?
thatdecisions on monetarypolicy in the United States are stronglyinfluenced by the executive branch, the notion that the presidentcan easily
use monetarypolicy as an electoral tool does not fitthe institutional
facts. A more subtle argumentis that an independent Federal Reserve
may be especially willing to accommodate the executivebranch's pressures formonetarypolicy duringelectionyearsin orderto preventsharp
movements in interestrates which would lead the Fed to be criticized.
We returnto this argumentbelow.
A second, more serious problem with the Nordhaus model is its reliance on irrationalbehavior on the part of voters. Voters are naive, not
simplyin the way theyformexpectationsofinflation,but also in the way
theyassess governmentperformance.Any voterwho has lived through
an election cycle in Nordhaus's world should not be fooled into voting
foran opportunistic,manipulative policymaker.He will know that the
pre-electionperiod of low inflationand high economic activitywill be
followed by a postelectionperiod of both high inflationand high unemployment.He should thereforepunish ratherthan reward an incumbent
who engages in pre-electoralmanipulation.
Finally, and more generally,one may question the central role assigned to moving along the Phillips curve to reduce unemploymentvia
inflationsurprises. Fiscal policy plays no role in the PBC in the model,
thoughtransfersand othertypesoffiscalpolicy appear to play an importantrole in some episodes of pre-electoralpolicy manipulation.
3. Empirical
TestsoftheNordhaus
Model
There have been many econometrictestsof the monetaryopportunistic
PBC, both foreconomic outcomes and forpolicy instruments.The most
common formof econometrictest of these models in termsof outcomes
is to run an autoregression of an economic performancemeasure on
itself,a small set of economic variables, and political dummies to test a
specifictheory.Consider a regressionof the form:
Yt =
i=1
aY,
+ bo+ 1bIX
j
dPDUMt
+ Et,
(4)
where Y is an outcome variable such as GDP, the Xj are othereconomic

variables that may also affectY, such as world economic activity,and
PDUM is a politicaldummyvariable (or set of variables) meant to represent a given political model. The autoregressivespecificationfor Yt is
adopted as a parsimonious representationof the time-seriesbehavior of

82"
DRAZEN
model. For example,as a testof the

Y,, insteadof using a structural
Nordhausmodelon quarterly
data,Alesinaand Roubini(1992),Alesina,
Cohen,and Roubini(1992),and Alesina,Roubini,and Cohen(1997)use
a dummyvariablethatequals 1 in the electionquarterand in the T-1
whereT mayequal 4, 6, or
quartersbeforetheelection,and 0 otherwise,
8. As the measureof economicactivityY theytakethe year-over-year
measure,theexactspecificagrowthrateofGNP or an unemployment
tiondependingon themodeland data set.
3.1 THEEFFECTOF ECONOMICCONDITIONSON ELECTIONS
Priortodiscussingtheeffect
ofelectionson macroeconomic
variables,one
mustconsidertheeffectof economicconditionson elections.A crucial
assumptionin the Nordhausmodel,or in any model of pre-electoral
is thatvotersvote on the basis of economicvariables.
manipulation,
Kramer(1971)regressedvotesreceivedby theincumbent
partyin U.S.
in
two
of
elections
measures
on
performance theyearof
congressional
theelection-thegrowthrateof realper capitaincomeand therateof
inflationin thatyear-and foundtheywere both significant
determiofeconomicconditionsforvotingin
nantsofvotetotals.Theimportance
congressionalelectionswas confirmedby Tufte(1975).6
The mostinfluential
workwas probablythatofFair(1978)[updatedin
Fiar(1982,1988)],who foundsimilarresultsfortheUnitedStates.In his
electionsfrom1916through
originalarticle,Fairlookedat presidential
if
that
hold
voters
the
1976,arguing
partythatholds the presidency
accountableforeconomicevents,theirinfluenceshouldbe seen most
stronglyin presidentialelections.Fair foundthatthe change in real
in theyearoftheelection,as measuredeitherby the
economicactivity
in the
in
real
per capitaGNP or the changein unemployment
change
effect
on votesforpresielectionyear,does appearto have an important
a 1% increasein thegrowthrateincreasestheincumdent.Specifically,
evidencesuggestsitmaybe the
bent'svotetotalby about1%. (Further
in
and thirdquartersof the
GNP
the
second
real
of
per capita
growth
but data limitations
electionyearthatis important,
preventFairfrom
what
of
about
definitive
conclusions
part theelectionyear
drawingany
in determining
voterbehavior.)Giventhegrowthof
is mostimportant
conothermeasuresofmacroeconomic
economicactivity,
performance
of the othermeasuresis the inflation
tributelittle;the mostimportant
rate in the two-yearperiod beforethe election,as measuredby the
A secondkeyfinding
ofFair'sis thatvoters
changein theGNP deflator.
6. Though most studies confirmthe basic results, Stigler(1973) concluded that congressional election resultsare not affectedby economic fluctuations.See also Okun's (1973)'
commenton Stigler,as well as Arcelus and Meltzer (1975) and Bloom and Price (1975).

25Years83
Business
ThePolitical
Cycle
after
?
they
appeartohave a highdiscountrateon pasteconomicperformance;
don'tlookbackmorethana yearor two.7
ofpreNumerousotherarticlesfindsimilarresultson theimportance
electionconditionson votingpatternsin both the UnitedStatesand
othercountries.Lookingat votingor popularityfunctions,
Lewis-Beck
(1988)foundthatthesortofresultsthatKramerand Fairreportforthe
UnitedStateshold in Britain,
France,WestGermany,
Italy,and Spainas
well. Madsen (1980)reportedsimilarresultsforDenmark,Norway,and
Sweden.8We summarizethisas:
1 Aggregateeconomicconditionsbefore
an election,specifically
REGULARITY
havea
(and to a lesserextentinflation),
percapitaoutputor income
growth
on votingpatterns
in theUnitedStatesandothercountries.
significant
effect
3.2 ECONOMICACTIVITY
Numerouseconometric
testsprovidelittlesupportforthepoliticalcycle
in economicactivity
predictedby theNordhausmodel.Studiesforthe
UnitedStatesbegan withMcCallum's(1978) studyof unemployment
fluctuations
beforeelections.Alt and Chrystal(1983)summarizeearly
studies
as showinga strikinglack of support,a point reempirical
inforced
results
summarizedin Alesina,Roubini,and Cohen (1997).
by
Faustand Irons(1999),usingmoresophisticated
techniques,cometo a
similarconclusion.Figure1,showingmeanratesofGNPgrowth(seasonally adjusted)by quarterof the president'stermin the UnitedStates
from1948to 1998,illustrates
thepoint.9
no
evidence
was
foundin developedeconomiesoutsidethe
Similarly,
UnitedStatesfora Nordhaus-style
PBC forunemployment
or economic
growth(Paldam,1979;Lewis-Beck,1988).Alesina,Roubini,and Cohen
7. One should distinguish aggregate from individual economic conditions on voting.
Lewis-Beck (1988) argues thatindividuals vote on the basis of nationaleconomic performance (sociotropicvoting) ratherthan theirown personal economic situation("narrow
pocketbook" voting).
8. What about the effectof economic conditionson the timingof elections when governments can call early elections?Ito (1990) finds evidence that governmentsin Japan do
not manipulatepolicies in anticipationofupcomingelections,but thattheyopportunistically manipulate the timing of elections to take advantage of autonomous economic
expansions. Specifically,high growthsignificantlyincreases the probabilityof an election, while high inflationsignificantlyreduces it. Chowdhury (1993) reports similar
resultsforIndia, with the governmentmore likelyto call earlyelectionswhen economic
timesare good. On the otherhand, Alesina, Cohen, and Roubini (1993), argue thatfora
sample of 14 OECD countrieswith endogenous election timing,thereis no evidence of
such an effectin countriesotherthan Japan.
9. A plot of median growthrates, or of other measures of aggregateeconomic activity,for
the United States would tell a similarstory.

84 DRAZEN
Figure1 MEAN GNP GROWTHRATE,1948-1998
10
8
0
a.
S6
4--
2
0
0
9 10 11 12 13 14 15
Quarteraftertakingoffice
(1997) rejectan opportunistic
cyclein real activityfora sample of 18
OECD countriesovertheperiod1960-1993.10
PBC reWe summarizethe generalconsensusthatthe opportunistic
behaviorofGNP or unemployceiveslittlesupportin thepre-electoral
mentas:
inaggregate
economic
2 Thereis nosignificant
increase
REGULARITY
activity
or
countries.
the
States
other
OECD
either
United
to
elections
in
prior
3.3 INFLATION
increasein inflation
The postelectoral
predictedby theNordhausmodel
receivessupportin some countriesand notin others.Alesina,Cohen,
and Roubini(1992) and Alesina,Roubini,and Cohen (1997)testfora
(measuredas thegrowthrateoftheCPI over
politicalcyclein inflation
theprevious4 quarters),usingthesame data setand methodology
they
used forGNP growth,and defininga political dummy equal to 1 in the
theelection,and 0 otherelectionquarterand in the3 quarters

following
time-series
wise. In a pooled cross-section,
theyfinda highly
regression,
10. If aggregate economic performanceis importantin determiningthe way people vote
and governmentswant to win re-election,why don't we observe a clear opportunistic
PBC? Lewis-Beck(1988) argues thatitis because it is exceedinglyhard to timeeconomic
manipulation. Monetary and fiscalpolicy can be used only with great imprecision,so
that politicians cannot expect to time the aggregate stimulus to come rightbefore an
election,while the risksassociated with a mistimedexpansion are high. Anotherexplanation is thatopportunisticpoliticianstargettransfersto a fractionofvoterswithminor
effecton aggregate economic activity.The AFPM model in Section 9 includes both of
these possibilities.

ThePolitical
Business
25 Years 85
Cycleafter
?
Figure2 MEAN INFLATIONRATE(CPI), 1960-1978
8
64-
02
0 1 2 3 4
5 6 7 8 9 10 11 12 13 14 15
significantcoefficientof the correct sign on the political dummy; in
the individual country regressions,they find the coefficientis of the
correctsign in almost all the regressions,and significantat the 10% or
higher level for Denmark, France, Germany,Italy,and New Zealand.
Overall, theyconclude the PBC effecton inflationis widespread across
OECD countries(on the basis of theirpooled regression)and on a much
strongerempiricalfootingthan the effecton GNP and unemployment.
The evidence forthe United States is less clear. In similarteststo those
described above, Alesina, Roubini, and Cohen (1997) rejectthe existence
of a postelectoralsurge in inflationover the period 1947-1994. However,
the behavior ofinflationafterelectionschanged over thissample period.
After1979 thereis no evidence of a politicalinflationcycle,which corresponds to the timingof the change in Federal Reserve policy rules in
1979. (See, forexample, the estimatedpolicy rules in Clarida, Gali, and
Gertler,2000.) Priorto thishowever, thereis more evidence of a possible
postelectoralincrease in inflation.This is consistentwith otherstudies,
and is illustratedin Figures 2 and 3, showing mean annualized CPI
inflation(seasonally adjusted) from 1960 to 1979 vs. 1979 to 1998 by
quarterof the president's term.(A graph for1948-1979 looks verysimilar to 1960-1979, but the latteris used forbettercomparabilitywith later
figures.)
To summarize:
REGULARITY3
In manyOECD countriesthereis a clearpostelectoral

increase
in inflation.
In theUnitedStates,thereis evidenceofsucha postelectoral
increase
in inflation
priorto 1979, butno evidencethereafter.

86-DRAZEN
3 MEANINFLATION
RATE(CPI),1979-1998
Figure
7
cc5
4
2
1
0
0
10
11
12
13
14
15
3.4 MONETARY
INSTRUMENTS
the resultsforexpansionarymonetarypolicybefore
Not surprisingly,
thoseforinflation
afterelections.Usingthesamepolitielectionsmirror
cal dummytheydid forinflation,
Alesina,Cohen, and Roubini(1992)
finda significant
effect
for
the
political
yearlyM1 growthratesin pooled
in
time-series
cross-section,
regressions theirsampleofOECD countries,
withmoneygrowthbeinghigherfortheyearto year-and-a-half
before
theresultsare less strong,though
elections.In thecountryregressions,
effects.
a num'ber
ofcountriesdisplaysignificant
oftheinflation
FortheUnitedStates,thesensitivity
resultstothetime
in
as
is
seen
rates
well.
considered
Alesina,Cohen,
moneygrowth
period
and Roubini(1992)findonlyveryweakevidenceofa politicalmonetary
in Alesina,Roubini,
cyclein thepostwarperiod,a conclusionreinforced
and Cohen (1997)fortheperiod1949-1994.In contrast,
Grier(1989)and
for
an
office-motivated
modelof
Beck(1987)bothfindsignificant
support
in
United
States
over
the
1960-1980.
the
Grier,
subperiod
monetary
policy
data from1961to 1982,regressesM1 growthon its
usingU.S. quarterly
and a politicaldummyspecideficit,
previousvalue,thefull-employment
fiedas a fifteen-quarter
lag on a
polynomialdistributed
second-degree
in
and
zero
othera
one
election
which
takes
value
of
the
quarter
dummy
to
on
distributed
is
chosen
conserve
wise. (Thepolynomial
lag
degreesof
of
influences
that
the
an
election
He
finds
freedom.)
timing
significantly
in
interest
when
fluctuations
even
rates,and the
output,
moneygrowth,
deficitare held constant.Beck (1987)also findsa politicalcyclein the
moneysupplyin theUnitedStatesoverthesameperiod.Figures4 and 5
presentmean M1 growthrates(seasonallyadjusted)by quarterof the
termovertheperiods1960-1979and 1979-1998.Interestingly,
president's
suchas reservesor
Beckfindsno similarcyclein monetary
instruments,

25Years87
Business
ThePolitical
after
Cycle
.
Figure4 MEAN M1 GROWTHRATE,1960-1978
8
(f6-
0 4
X.
2
0
1 2 3 4 5 6
7 8 9 10 11 12 13 14 15
Figure5 MEAN M1 GROWTHRATE,1979-1998
12
10
8-
0o 6
42
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
the federal funds rate, a point made clear in Figure 6, giving the mean
federalfundsrateby quarterof termfrom1959 to 1998. The differencein
resultsforthe behavior of money growthand instrumentsof monetary
control will be central to our model of the PBC presented below. We
summarize these resultsas:
in money
4 Thereis evidence
increase
REGULARITY
growth
ofa pre-electoral
In theUnitedStates,there
is a pre-electoral
ratesinmanycountries.
effect
from
There
isnoevidence
Statesofan
1960to1980,butnonethereafter.
fortheUnited
electoral
fundsrate.
cycleinthefederal

88 - DRAZEN
Figure6 MEAN FEDERALFUNDS RATE,1959-1998
c5
8
7
6
'* 4
C3
9 10 11 12 13 14 15
4. Monetary
Partisan
Models
The basic partisanmodel startswith the observationthatright-wingand
left-wingparties have different
positions on economic issues and hence
differentmacroeconomic objectives. In terms of the objective function
(2), they have differentpreferencesover inflationand unemployment,
both in inflationand unemploymenttargetsand the relative dislike of
inflationvs. unemployment.
4.1 THE BASIC HIBBSMODEL
The partisan PBC model was introducedby Hibbs (1977). To represent
the differencein interests,we replace the social loss function(2) by a
partisan loss function:
= aI
(xt
+ (
2 Xi()2
-r
)2
T-
'
(5)
forpartyj, where i1ris partyj's targetrateofinflation,.j is partyj's target

foreconomic activity,and d is the relativeweightput on output fluctuations relativeto inflationfluctuationsby partyj. There are two parties,a
left-wingparty,denoted L, and a right-wingparty,denoted R. The two
parties are characterizedby the followingpossible differencesin their
objectives. First,the left-wingparty may have a higher targetfor economic activitythan the right-wingparty.Second, the left-wingparty
may assign a largercost to deviations of economic activityfromits target
level than to deviations of inflationfromthe target.Finally,the left-wing
partymay have a higherinflationtargetthan the right-wingparty,independentof the effectson economic activityvia the Phillips curve, which

ThePolitical
Business
25 Years 89
Cycleafter
?
could reflectothereffectsof inflationviewed differently
by the two parties. To summarize the differencebetween the parties:
5-L> tR
aL >- aR
(6)
To obtain the partisan cycles,at least one of these must hold with strict
inequality.
Fluctuations in economic activityinduced by these partisan differences are generated in the basic Hibbs model by movements along an
exploitablePhillips curve,where it is assumed, as in the basic Nordhaus
model, thatexpectationsare not rational.Thus, the left-wingpartywill
pursue a more expansionary monetary policy throughoutits term.n
How long these effectslast depend on the exact specificationof expectations. In an adaptive expectationsframework,the more slowly inflation
expectations adjust to actual inflation,the longer will be the partisan
effect.
A basic criticismof the original Hibbs model is the same as the one
that was applied to the Nordhaus model, namely that it relies on mistaken expectations of what policy will be in order to get real effects.
Hence, to the extentthatitis assumed thatmonetarypolicyis used to hit
partisanunemploymentand growthtargets,the explanationofthepolitical business cycle is unsatisfactory.
4.2 ALESINA'SRATIONAL-PARTISAN
MODEL
Alesina (1987, 1988) introduced rational expectationsinto a monetarybased PBC, influencedby the criticismofmodels based on an exploitable
Phillips curve. In his partisan model with rational expectations, only
surprise inflationaffectsoutput, leading to Alesina's termingthe apmodel. The rational-partisanmodel can be
proach the rational-partisan
a
similar
represented by
three-equationmodel to that used by Nordhaus, retainingthe expectations-augmentedPhillipscurve (1) but changing the othertwo components. First,followingHibbs, the motivationof
policymakersis quite differentthan in the Nordhaus model: they are
purely partisan,with no opportunisticmotives and hence no desire to
manipulate outcomes. To represent the differencebetween economic
effectsin the early part and the latterpart of an incumbent's term of
office,Alesina divides a termof officeinto two periods and assumes that
11. As in the Nordhaus model, the key assumption here is that, in spite of the Federal
Reserve's formalautonomyin the United States, monetarypolicy reflectsthe administration'smacroeconomicgoals.

90- DRAZEN
there is an election every other period, say at t, t+2, t+4, .
. .
. It is
so thatthe
assumedthata partycaresonlyaboutitsown termofoffice,
by an
objectivefunctionof partyj at timet may thenbe represented
extendedversionof(5), namely
aI
Al=Aa(xt
+
2j)2 +(Vt.-
(7)
jCj)2
ai(xt+l + _tj)2
(t- 1
)2
forpartyj, where i?7and ?j are the partisantargets,ai is the relative

weightputon outputdeviationsbypartyj, and P is thediscountfactor.
as in theHibbsmodel,by (6) above,where,in
These are characterized,
orderto obtainthecyclesin therational-partisan
model,at leastone of
theinequalitiesin (6) mustbe strict.
The othercrucialchange,relativeto boththe Nordhausand Hibbs
models,is thatAlesinareplacestheassumptionofadaptiveexpectations
so insteadof(3),expectedinflation
byrationalexpectations,
7ris givenby
=
rt Etl(Tt).
(8)
and unemployment
theevolutionofinflation
In determining
duringa
in
model
is
termofoffice,say t and t+ 1, thekeyvariable the
expected
in thoseperiods,thisexpectation
inflation
beingformedbeforetheelecin each halfterm,the
tionin periodt. Conditionalon expectedinflation
(7) subjectto
partyin powerchoosesitsoptimalpolicy,by maximizing
(1). We retaintheassumptionfromearliermodelsthatthegovernment
deof inflation
In turn,expectations
has perfectcontroloverinflation.
If
outelection.
will
win
the
of
who
the
on
upcoming
expectation
pend
comeswerefullyknown,therewouldbe no cycle,sincea party'spolicy
on realactivity.
and hencehave no effect
wouldbe fullyanticipated
about election
The existenceof a cyclethusdependson uncertainty
forthe halftermafterthe electionis the
outcomes.Expectedinflation
weightedsum of the two parties'policies,weightedby theprobability
thateach willwintheelection,namely,
7;
qLTr
+ (1 -
qL)rt,
(9)
thattheleft-wing
whereqLis theprobability
partywillwin theelection,
and where IrL and irr' are the optimal policies of the two parties in the

The PoliticalBusinessCycleafter25 Years 91

?
halfoftheterm,whichdependnotonlyon theirpolicypreferences
first
but
also on the electionprobability
(6),
qL itself,as optimalpolicydea moreinflationary
on
Since
the
follows
policy
pends 7rr.
left-wing
party
is between
once in officethanthe right-wing
party,expectedinflation
thesetwovalues. Hence,thereis a positiveinflation
surpriseiftheleftwins
the
below thenatuelection,implying
wingparty
unemployment
ralrate,and a negativeinflation
if
surprise theleft-wing
partywinsthe
above thenaturalrate.In thesecond
election,implying
unemployment
in economicactivity,
halfofa president'sterm,thereareno fluctuations
as theidentity
ofthepartyin poweris knownwhencontracts
aresigned
(in the firstpartof the term).In contrast,Hibbs's partisanmodelsugin left-wing
administrations
thaninrightgestshighereconomicactivity
overthelifeoftheterm.12
wingadministrations
4.3 A CONCEPTUAL
ASSESSMENT
OF THE
RATIONAL-PARTISAN
MODEL
Thetheoretical
oftherational-partisan
structure
modelraisesa numberof
questionsabouttheunderlying
drivingforces.First,and mostdifficult,
thereis thequestionofwhether
theunderlying
microeconomic
structure,
nominal
contracts
before
makes
sense in
elections,
namely
wage
signed
the contextof the model. The questionof microfoundations
is often
raised about models in whichpolicymakers
an
exploit expectationsofelectoraleffects
augmentedPhillipscurve,buttheimportance
givesit
A
here.
standard
used
also
is
Alesina,
specialimportance
argument,
by
thatnominalwage contracts
aresignedatdiscreteintervals,
wherenominal wage increasesreflect
inflation
at thetimethe
rationally
anticipated
contractis signed,so thatsurpriseinflation
betweencontract
datescan
have real effects
even when agentsare rational.The basic problem,as
(1988)pointsout,is that,on theone hand,electionsarean imporRogoff
tantsourceof fluctuations
due to theiroutcomesbeingless thanfully
on
the
theelectiondateis fullyknown.The magbut,
other,
anticipated,
nitudeofthechangesininflation
and unemployment
themodelis meant
to explainare sufficiently
that
a
there
should
be
large
largeutility
payoff
to eliminating
theuncertainty
thatleads to thesefluctuations.
Butthatis
effect
on unemployment,
easy to do. To theextentthereis a significant
12. Hibbs (1994) presentssuch a theoryof adjustmentof partisanobjectivescontingenton
economic outcomes and learning, which predicts that unemploymentand inflation
outcomes across the two parties may diverge more in the firstpart of theirtermsthan
in the second, though not because of uncertaintyabout electoraloutcomes. The key to
Hibbs's model of changing objectives (and to the result on time-varyingoutcomes) is
that policymakers
are uncertainabout the structureof the economy and the effectsof
policies. They use outcomes to refinetheirbeliefsabout attainabletargets,leading to a
feedbackfromoutcomes to partisan objectivesand thus policies.

92 - DRAZEN
old contractsshould be timed to expire and the signingof new contracts
postponed untiljust afteran election,so thattheycan reflectthe election
results. Hence, the main drivingforceof the model would seem to depend on behavior of workersand unions thatis less than rational,not in
theformationoftheirexpectationsper se, but in theirlabor-supplybehavior. A simple change in the timingof contractbehavior would eliminate
thepoliticalcycle.Garfinkeland Glazer (1994) presentempiricalevidence
that for labor contractsof less than two years signed in a presidential
electionyear,thereis a clear tendencyto delay the signingof labor contractsuntilafterthe election.13
A second crucial question concerns the electoral uncertaintythat
drives the model. The magnitude of the cycle depends on the degree of
electoraluncertainty,as well as on the differencein the parties' desired
inflationrates. One problem is that these key drivingforcesare exogenous. Far more troublesome is the predicted positive correlationbetween the extent of the electoral surprise and the size of postelectoral
movements in real economic activity.As the key probabilityqL approaches zero or one, the magnitude of the fluctuationswill approach
zero, with fluctuationsbeing maximal (all else equal) forq' = 1. Hibbs
(1992), among others, has argued that this predictionis not consistent
with the empiricalevidence forthe United States. Considerationof individual elections reveals the problem. For example, the outcome of the
1964 presidentialelectionis probably the closest we have seen to a sure
thingin the postwar era, with Lyndon Johnson'svictorywidely anticipated. Yet the rate of real GNP growth in the firsttwo years of the
Johnsonadministrationaveraged 5.8% per year, the highest figureof
any Democratic administration.In contrast,among postwar Republican
victoriesthroughRegan's firstelection,Nixon's victoryin 1968 was the
closest and least certain,but corresponds to the smallest drop in real
output in the criticalsecond year of the administration.
Alesina, Roubini, and Cohen (1997, Chapter 5) constructan index of
electoral surprise forthe U.S. presidentialelections from1948 to 1992,
withRepublican victoriesenteringas negativesurprises.They use different variantsas an explanatoryvariable in a real-GDP-growthregression
of the form(4) and find that the coefficienton the surprisevariable is
significantlypositive, meaning thatlargerDemocratic (Republican) surprises implyhigher(lower) postelectionreal growthrates. The construc13. Garfinkeland Glazer's resultsmay be interpretedin two ways. One is thatpostponement of contractsigning indicates that electoral uncertaintyis importantin forming
inflationexpectations,consistentwith the basic thrustof the rational-partisanmodel.
The otheris thatin industrieswhere this is true,contractsigningis postponed, undercuttingthe empiricalrelevance of the main drivingforceof the model.

ThePolitical
Business
25 Years- 93
Cycleafter
tion of the variable is complicated, so that it is not easy to see why the
resultsof the regressionand of the simple case study do not agree. The
relationof pre-electoraluncertaintyand postelectoralfluctuationsis an
importantquestion deservingfurtherresearch.
A finalquestion, which can be applied to all the models discussed so
far,is the central role assigned to moving along the Phillips curve to
reduce unemploymentvia inflationsurprises.That is, even though real
effectsof monetarypolicy are consistentin this approach with rational
expectations, the reliance on monetarypolicy as the driving force of
cycles is inconsistentwith the evidence on the importantrole of fiscal
policy in PBCs. We returnto thispoint in Section 6.
5. Empirical
TestsofPartisan
Models
The partisan PBC has been tested less than the opportunisticmodel.
There is general agreementon the existence of partisan effectsper se,
especially on economic activity.However, thereis farless consensus on
the mechanism at work.
5.1 ECONOMIC ACTIVITY
Perhaps the strongestregularityin the U.S. data was firstpointed out by
Alesina (1988), with Faust and Irons (1999) confirmingthe effectover a
longer time period using more sophisticated econometrictechniques:
For the United States, real GDP growth is substantiallyhigher under
Democrats than Republicans in years 2 and 3 of theiradministrations.
Alesina, Roubini, and Cohen (1997) reportthatover the period fromthe
firstquarter of 1949 through the second quarter of 1994, growth rates
during Democratic and during Republican administrationssharply diverge startingabout the thirdquarter afterthe election. The quarterly
growthrate averaged over Democratic administrationsrises fromabout
3% per annum in quarter3 to about 6% per annum by quarter6 or 7 in
the administration'stermof office,and fallsfromthe same level to zero
by quarter6 or 7 in the administration'stermaveraged over Republican
administrations.Real GDP growthratesthen improveunder Republican
and worsen under Democraticadministrations,so thatin the fourthyear
of the administration,the growthperformanceunder the two parties is
identical. Unemploymentshows analogous partisan patternsin the expected direction.Alesina, Roubini, and Cohen (1997) presentmore formal econometrictests forthe United States to confirmthis result,using
autoregressiveequations like (4) in quarterlydata from1947:I through
1993:IV with a political dummy that equals +1 in the firstpart of a
Republican administration,-1 in the firstpart of a Democraticadminis-

94* DRAZEN
tration,and 0 otherwise.Theyreportresultsfavorableto the rational
Theyfinda
partisantheoryforrealGDP growthand forunemployment.
but
an
the
whole
life
of administration,
politicaldummyover
significant
administrathe
and
halves
of
by dividingthevariableintofirst second
tion,theyrejectHibbs'sversionofthepartisantheory.
Theyrunsimilar
testson a sampleof18 OECD countriesovertheperiod1960-1993,also
modeland lackofsupportfor
findingsupportfortherational-partisan
boththeHibbsand theNordhausmodel.
in bothoutput
Faustand Irons(1999)findsimilarpartisandifferences
in thefirsthalfofthe
whichare strongest
growthand unemployment,
remainseven after
term.However,theyfindthispartisandifference
as
forobservableeconomicvariablesand forpoliticaleffects
controlling
in partisanmodels,suggestingthatthedata do notgivesupportto any
effectssimilarto
partisanmodel. Graphsof quarter-after-inauguration
thosepresentedheremaybe foundfora largegroupofvariables.The
is
on whichthereis wide agreement
keyempiricalregularity
in the
on economic
5 Thereis a clearpartisan
REGULARITY
activity
effect
underDemoUnitedStates,witheconomic
higher
activity
beingsignificantly
inthefirsthalfoftheirterms.
cratsthanRepublicans
5.2 INFLATIONAND MONETARYPOLICY
in inflation(as measuredby the rateof

Thereare partisandifferences
simPrice
in
the
Consumer
Index),
thoughtheydo notconform
change
Demothe
the
to
theory.
especially rational-partisan
partisantheory,
ply
thanRepublicanadhave loweraverageinflation
craticadministrations
is rising
in the firsthalfof theirterms,but thatinflation
ministrations
a finding
underDemocratsand fallingunderRepublicans,
reportedboth
and
Irons(1999).
Faust
and
and
Cohen
Roubini,
Alesina,
(1997)
by
by
data forthe UnitedStatesdo not supporta
Hence, the basic inflation
shouldbe higher
monetary
partisanmodel,wherebythelevelofinflation
underDemocratsthanRepublicans.
theseresults,Alesina,Roubini,and Cohen arguethat
In interpreting
foundin changesin inflationratesare consistentwith
the differences
sincethe
is onlypartially
theirtheory,
convincing,
thoughtheargument
the
on
based
Phillips
expectations-augmented
theory
rational-partisan
not on changesin thatrate.The
curveis builton the rateofinflation,
testsforinflationcyclesin the UnitedStatesare farless
econometric
testsdisfavorableto partisanmodels,parallelingthe nonparametric
cussed above. Alesina,Roubini,and Cohen (1997)findthatafter1973
ratesafterthecollapseofBretton
Woods),the
(and themoveto floating
and Republican
ratesbetweenDemocratic
in averageinflation
difference

ThePolitical
Business
25 Years 95
Cycleafter
?
administrations
is onlyabout 1.8% per year.Theypresentno formal
withinadministrations,
thatis, whether
testsofthe timingof inflation
inflation
ratesarehigherin thefirst
halfofDemocraticthanRepublican
in thesecondhalf.
withthesedifferences
administrations,
narrowing
In contrast
to theworkofAlesinaand coauthors,
Sheffrin
(1989)finds
the empiricalevidencein favorof the rational-partisan
theoryto be
weak forboththe UnitedStatesand othercountries.For example,he
vicarguesthateconomicfluctuations
following
Republicanpresidential
withthe rationaltoriesin the UnitedStatesare generallyinconsistent
recessionsoftencomingas a surprise.He
partisantheory,
postelectoral
arguesthathis weak resultsare due, amongotherthings,to theimportance formacroeconomicfluctuations
of factorsotherthan unanticiFaustand Irons(1999)findno support
patedmonetary
policy.Similarly,
forpartisaneffects
operatingthrough
monetary
policy.We sumup these
as:
disagreements
"REGULARITY"
6 Thereis no consensuson the role of monetarypolicyor
withviewsvaryingwidely.
inflation
surprisesin drivingpartisaneffects,
6. FromMonetary
toFiscalPolicy
We have so farconsidereda numberoftheoretical
and empiricalissues
raisedby monetarymodels of the PBC. Each of the modelshad consomemorethanothers.I thinkitis
ceptualand empiricalshortcomings,
fairto say thatnone ofthethreebasic modelsconsideredso farreceive
overwhelming
supportin thedata. This suggeststhataftertwenty-five
years,monetary
surprisesas a drivingforceofa PBCjustdo notprovide
a veryconvincing
story.
I consideredthe basic opportunistic
and partisanmodel and the rationalmodelas a grouptostressthispoint,thatis,tostresstheirsimilaritiesratherthantheirdifferences.
Allthreemodelsmentionedaboverely
on a Phillipscurveas thevehiclebywhichtheeconomyis manipulated.
when it is unanticipated,
inducesmovementsin
Inflation,
particularly
as
the
moves
or
down
thePhillipscurve.
unemployment,
economy
up
Hence, activemonetary
policyis thekeydriving
force.Second, monetary
policy
is basicallychosenbypoliticiansaccording to theirdesires-an incumbent
intheopportunistic
models,ora newlyelectedadminisfacingre-election
trationwithspecificmacroeconomic
goals in the partisanmodels.The
is
subservient
the
to
and inno sensedoes
monetary
authority
politicians,
it make independentmonetarydecisions.These two characteristicsactivistmonetarypolicy(morespecifically,
monetarysurprises)as the
and
control
of
force,
driving
monetary
policybypoliticians-donotvery

96 - DRAZEN
well describe eitherPBCs or central-bankbehavior. Countries in which
political cycles are observed are oftencountries seen as having highly
independent centralbanks. Hence, the view ofmonetarypolicy as being
dictatedby politiciansdoesn't sound right.
An alternativeapproach is thatfiscalpolicyis the key drivingforce,
especially in pre-electoralmanipulation,in many countries.Tufte(1978)
documents a number of clear incidents of pre-electoralopportunistic
manipulation of fiscal transfers,both social security payments and
veterans benefits. Keech and Pak (1989) found an electoral cycle for
veterans' benefitsin the United States between 1961 and 1978, but argued that it had subsequently disappeared. Similarly,Alesina (1988)
shows that therewas an electoralcycle in net transfersrelativeto GNP
over the period 1961 to 1985, but that the electoral effectdisappears if
one extends the sample back to 1949. Alesina, Cohen, and Roubini
(1992), as well as Alesina and Roubini (1990), findevidence foran opportunisticcycle in transfers,though theyargue thatthereis no evidence of
a fiscalcycle forinstrumentsotherthan transfers.
These effectsmay be seen by looking at governmenttransfersto individuals net of social insurancecontributionsrelativeto GNP (seasonally
adjusted and detrended), as a functionof the quarterof the president's
term before, from 1960 to 1978 in Figure 7 and from 1979 to 1998 in
Figure 8.
This evidence on fiscalpolicy suggests a last regularityforthe United
States and otherdeveloped countries:
7 Thereis evidenceofpre-electoral
increasesin transfers
and other
REGULARITY
In theUnitedStates,this
in a number
ofcountries.
fiscalpolicyinstruments
to
1980.
prior
appearsstrongest
effect
7. FiscalCyclesinDeveloping
Countries
Before considering the implications of these regularitiesin the United
States formodeling the business cycle,itis instructiveto look at developing countries.Recentresearchhas found thatthe fiscalcycleis especially
strongin developing countries.As in the United States, there is much
anecdotal evidence of fiscalmanipulationbeforeelectionsin othercountries.For example, in Israel, Ben-Porath(1975) shows convincinglythat
opportunisticpolicymaking in light of elections was quite consistent
over the period 1952-1973, with tax cuts implementedbeforeelections,
but tax increases only after.Pre-electoralfiscalmanipulation was especially strongin the 1982 elections,and Brender(1999) findsevidence of

ThePolitical
Business
25 Years- 97
Cycleafter
Figure7 RATIOOF NET TRANSFERSTO GNP,1960-1978
0.5
0.4
0.3
n 0.2
. 0.1
S-01 0 1 2
-0.2
-0.3
-0.4
--
7 8 9 10 11 12 13 14 15
Figure8 RATIOOF NET TRANSFERSTO GNP,1979-1998
0.1
0.05
-0.05 0 1 2 3 4 5 6 7
5 -0.1
-0.15
= -0.2
-0.25
8 91\0
12
14 5
-0.3
fiscalmanipulationbeforethe most recentelections (althoughhe argues
that it hurt rather than helped the incumbents). Krueger and Turan
(1993) argue that pre-electoralfiscalmanipulationwas common in Turkeyin the period 1950-1980. Pre-electoralfiscalmanipulationis common
in Latin America,the increase in the quasifiscal deficitin Mexico before
the 1994 elections being but one of many examples. [Gonzalez (1999b)
shows the existence of an electoral cycle in governmentspending in
Mexico over the period 1958-1997 in both presidentialand congressional
elections.] Several studies have found significantpre-electoralincreases
in public spending in India beforeelections.
Cross-countrystudies yield similar results. Ames (1987) presents a

98-DRAZEN
in whichhe showsthatover
panelstudyof17 LatinAmericancountries
increasedby6.3%inthe
theperiod1947-1982,government
expenditures
yearand decreasedby 7.6% in theyearafterthe election.
pre-election
Block(2000)presentsevidenceofa politicalbusinesscyclein bothfiscal
and monetary
policyin a crosssectionof44 sub-SaharanAfricancountries.Schuknecht
(1996)is probablythefirst
studyofthe
comprehensive
overtheperiod1970politicalbusinesscyclein 35 developingcountries
1992.He argues thatthereshould be moreroomformanipulationin
as checksand balancesareweakerand theincumdevelopingcountries,
and fiscalpolicy.He arguesthatin
benthas morepowerovermonetary
offreeor
countries
(suchas distribution
policies
expenditure
developing
via publicworksprograms)
subsidizedgoodsoremployment
generation
thantaxcutsin affecting
voterbehavior.He
are probablymoreeffective
uses a politicaldummywhichis positiveintheyearofelections,
negative
in the yearafter,and zero otherwisein fiscaldeficitand outputautoeffect
ofelectionson
suchas (4) and findsa clear,significant
regressions
on output.
effect
thefiscalbalance,butno significant
Gonzalez (1999a) and Shi and Svensson (2000) extendthe Rogoff
ofthedegreeof
(1990)modelofpoliticalbudgetcyclestostudytheeffect
Gonzalez
considersthe
of
fiscal
the
on
cycles.
magnitude
democracy
fiscalmodel set out in a subsequentsection(but withouta monetary
variables:the cost of removinga polsector),includingtwo further
and transparency,
from
office
(thedegree
meaning
ofdemocracy),
icymaker
thatvoterslearntheincumbent's
theprobability
competencecostlessly,
thatis, independentofsignaling.She findsthatwitha highenoughcost
willnotbe removedfromoffice
incumbents
ofremovingofficeholders,
and willfollowtheirfull-information
optimalpolicy.An electoralbudget
a
if
cycleemergesonly removing politicianfromofficeis nottoo costly.
effects:
thehigherthedegreeoftransparalso has intuitive
Transparency
bestin the
distortion
of
the
amount
smaller
the
awayfromthefirst
ency,
a
correlation
is
when
there
positive
politicalbudgetcycle.Interestingly,
betweenthe degree of democracyand transparency,
politicalbudget
levels.Shi and
cyclesariseonlywherebothmeasuresareat intermediate
in a Rogoff
Svenssonincludea similarmeasureoftransparency
politicalmodel,but wheregovernment
spendingis chosenbefore
budget-cycle
so thatno signalingoccurs.(See
learnsitscompetence,
thegovernment
theirfootnote
9.)
Gonzalez (1999b)considersthe relationbetweenthelevel of democof the politicalcyclein a sampleof 43 countries
racyand the strength
in counovertheperiod1950-1997and findsthatthecycleis strongest
levels of democracy.Shi and Svensson (2000)
trieswithintermediate
suchas (4) fora sampleof123developedand develconsiderregressions

25Years99
Business
ThePolitical
Cycle
after
?
oping countriesover the period 1975-1995 and similarlyinclude an index of democracy.They also find that a fiscalpoliticalbusiness cycle is
especially strongin developing countries.
8. AnInitialSumming
Up
The argumentpresented so far is twofold. First,both empiricallyand
theoretically,a monetary-basedPBC model-either of manipulation of
aggregateeconomic activityvia monetarysurprisesbeforean election,or
of partisan effectsafteran election-is less than fullyconvincing.Second, thereappears to be a strongrole forfiscalpolicyin many countries,
includingthe United States in certaintimeperiods. This suggests basing
PBC models on fiscal ratherthan monetarypolicy. Conceptually,this
solves some basic problems forwhich monetaryPBC models have been
criticized.Fiscal policyhas real effectson economic activityeven ifanticipated. Moreover,it can affectvotingbehavior even ifthereare no aggregate effects.Since monetarypolicyis not the drivingforce,one need not
assume thatthe incumbentcontrolsmonetarypolicy.
However, basing a PBC model, or at least an opportunisticPBC model,
on manipulationoffiscalpolicyraises two keyquestions. First,howcanthe
thatareobserved
bemadeconsistent
witha PBCdriven
monetary
effects
byfiscal
policy?This question has at least two aspects: first,on a conceptual level,

what is the role of an independent centralbank in a fiscalinduced PBC,
and, on an empiricallevel, how can we reconcile the cycle in monetary
aggregates that often does appear before an election? Second, whydo
rational
voters
topre-electoral
Weconsiderthesequesrespond
manipulation?
tions in turn.
The key to the monetaryeffectsis that, as Woolley (1984) and Beck
(1987) have argued, an independent central bank may be willing to
accommodate the executivebranch's pressuresformonetarypolicy during electionyears in orderto preventsharp movementsin interestrates.
They do so in order to avoid any appearance of interfering
politicallyin
the electionprocess. Woolley,who has studied the politicalrelationbetween the U.S. president and the Federal Reserve more than anyone
else, puts it as follows (1984, p. 127):
ShermanMaiselwrotethat"FederalReservepolicyhas alwaysbeentoavoid,
ifpossible,takingany majormonetary
actionsas electionsapproach."This
conclusionwas echoedin severalinterviews
withFederalReserveofficials.
As Governor
Parteeputit,"ifyouwereto ask a centralbankeraboutwhathe
wouldwanttosee in a periodpriorto an election,he wouldsayhe wantedto

100-DRAZEN
ininterest
havestability."
ratesand themoneysupplywouldpresumStability
ablykeepthecentralbankfrombeingdraggedintopartisanpolitics.
The Fed is not so much interestedin pushing there-electionoftheincumbent as in simply "lying low" during the election so as not to be subsequentlycriticized.14
The role of monetarypolicy in a political cycle is more probably passive ratherthan active, accommodatingfiscalstimulithatopportunistic
policymakersmay employ to affectelection outcomes. This distinction
follows Beck (1987), who, as pointed out above, argued that there is a
political cycle in the money supply in the United States, but no cycle in
monetaryinstruments,such as reserves or the federal funds rate. The
reason is that the Federal Reserve accommodates fiscal policy in an
electionyear,so thatthereis a passive politicalmonetarycyclecaused by
a political cycle in fiscalinstruments,but the Fed does not activelyinduce a politicalcycle.15
Why do voters respond to pre-electoralmanipulation if they are rational?The basic argument,firstformalizedby Rogoff(1990) and Rogoff
and Sibert (1988), is that the enactment of policies that appear to be
opportunisticallyshort-sightedand the influencethey have on voters
may be due to a signalingeffect:votershave imperfectinformationabout
relevantcharacteristicsof potentialpolicymakers,and what appear to be
gimmicks have an effectbecause they are taken to provide relevant
informationabout candidates foroffice.Specifically,a governmentsignals its "type" by taking actions that worsen the budget situationwith
the notion thatonly someone who is verycompetentwould put himself
in thatsituation.
One criticismthathas been raised of thisapproach is thatitis the most
competentwho distortthe economy,a resultseen as unrealistic.A better
14. Both Beck and Woolley argue that the easy monetarystance of the Fed under Arthur
Burns in the 1972 presidentialelection was due to somethingmore complicated than
givingNixon the expansionarymonetarypolicy he wanted to ensure his re-election.It
mustbe seen against the backdrop ofwage-price controlsinstitutedthe previous year.
In October 1971, as part of Phase II, the WhiteHouse asked Congress forthe authority
to controlinterestrates and corporatedividends, but to forgouse of the authorityfor
the timebeing. This led to the formationof the Committeeon Interestand Dividends
(CID), of which Burns was chairman,responsible formonitoringinterestrates. Burns
was dead set against interest-rate
controls,but aware of the politicalpressure fortheir
imposition. He was thereforeespecially concerned about lettinginterestrates rise
during 1972, and, according to Woolley, communicated to the FOMC his concerns
about the politicalpressures foradministrativecontrolsthatrisinginterestrates would
induce. See Woolley (1984, Chapter 8).
15. Beck argues thatthis accommodationis why the monetarycycle thatboth he and Grier
(1989) findpeaks in the electionquarteritself,when the monetaryexpansion shouldn't
affectoutcomes.

ThePolitical
Business
25 Years 101
Cycleafter
?
way to view thisapproach,in myopinion,is thata more"competent"

can expandgovernment
spendingor reducetaxesand still
policymaker
would
thata less "competent"policymaker
not induce the distortion
induce.
Model
9. TheActive-Fiscal,
Passive-Monetary
theapproachsuggested
Wenow presenta modelofthePBC illustrating
in the previoussection.The fiscalside of the model followsRogoff's
(1990)modelof politicalbudgetcycles,withan incumbent
usingfiscal
is
controlled
to
his
re-election
by
policy help
prospects.Monetary
policy
whichmay nonethelessaccommodate
a separatemonetaryauthority,
fromexisting
fiscalexpansion.On a conceptuallevel themodeldiffers
thatcontrols
modelsin thatpoliticalcyclesreflect
nota singleauthority
all macroeconomic
but
who
influence
fiscalpolicy
elected
officials
policy,
that
and an independentmonetary
controls
authority
monetary
policy.
oftheseseparateforces.
The politicalcyclereflects
theinteraction
9.1 VOTERS
Votersare heterogeneous
in two dimensions.First,theutilityof every
voterdependson aggregateeconomicvariables,withthiseffect
givenby
a loss function
suchas (2). Votersdiffer
intherelativeweighttheyassign
to outputfluctuations,
a in equation(2), but have the
the coefficient
x
and
same targetsfor
vr. Second, the utilityof a subsetof votersis
affectedby some government-provided
publicgoods, whichare controlledby theincumbent
president,and all such votersplace thesame
valueon publicgoods. (Theseplaytheroleoftargeted
transfers
to
utility
Since the incumbentdoes not controlmacrospecificconstituencies.)
economicaggregates
on hisown (infact,theyaremoreinfluenced
bythe
monetaryauthority),
onlythosevoterswho receivepublicgoods will
have a preference
overcandidates.16
The implicit
votersis made to highlight
assumptionofheterogeneous
threeissues crucialto a fiscalmodelof the PBC and to PBC modelsin
of the populationmeans thatwe cannot
general.First,heterogeneity
thinkof a policymaker
as maximizing
the utilityof a "representative"
agent. This insightformedthe basis of partisanmodels and is more
of interests
is the
general.As I arguein Drazen (2000a),heterogeneity
16. This structureis a much simplifiedversion of the Dixit-Londregan (1996) model of
targetedtransfersin which voters differin the relative weights theyput on transfers
and policy preferences,with those most susceptible to transfersbeing targetedby
opportunisticpoliticians.

102- DRAZEN
17Second,transfers
can be targeted
centralconceptofpoliticaleconomy.
on votingas a
effect
to specificgroups,so thattherecan be a significant
on
resultoffiscalmanipulation
withouttherenecessarily
beingan effect
Third,whetheranyfiscalelectoralcyclehas
aggregateeconomicactivity.
willdepend,amongotherthings,on thepossiblesize
aggregateeffects
motivatedfiscalexpenditures
relativeto theeconomyas a
ofpolitically
of the monetaryauthority
whole. (It will also depend on the strength
relativeto electedpoliticians.)
therearetwogovernment-produced
Morespecifically,
goods:g, a public consumptiongood (measuredin per voterterms),and k, a public
ofa voteri who is affected
investment
by
good. In anyperiod,theutility
be
written:
may
provision
public-good
=
Ui(xt,1t,gt,k)
((Xt
(aj
T2)2)2
+
"
+2
gt
+ v(kt),
(10)
concavefunction
where ? 0, fr? 0, and v(-)is an increasing
satisfying
the Inada conditions.A voterof typei who is not affected
by public
onlycontainingthefirstexpressionon the
goods has a utilityfunction
are two periods,so thatthe expected
There
of
side
(10).
right-hand
is
i
horizon
over
his
of
voter
utility
E(n2i)=-Et
U(
(11)
wherejp< 1 is thevoter'sdiscountrate.18
SUPPLYOF ANDDEMANDFORGOODS
9.2 AGGREGATE
The aggregateoutputgap xtand inflation
ir,are relatedby an aggregate
element:
supplyrelationas in (1), butwitha stochastic
xt -=it - Etrt+1+ st,
(12)
where si is a supply shock describedby st= pst-1+ s9,with0 - p - 1, and
in
where9,is an i.i.d. mean-zerorandomvariable.Note thedifference
ofinterest
is betweena voterwhomaximizes
17. In Rogoff's(1990)paper,thekeyconflict
who caresaboutsocialwelfarebuthas theadditionalobjecand a politician
his utility
tiveofstayingin office.See equation(17)below.
shock.Its role
18. As in Rogoff(1990),theremayalso be a nonpecuniary,
leader-specific
inwhichpolicygivesno informaherewouldbe toensurethatina poolingequilibrium
for
Thisis important
is notelectedwithcertainty.
an incumbent
tionaboutcompetence,
butsuppressedhere.
someoftheproofsofequilibrium,

* 103
ThePolitical
Business
25 Years
Cycleafter
theexpectedinflation
termfrom(1),whereitis expectedfutureinflation,
ratherthancurrentinflation,
thatenters.This changeis to make the
side
of
withrecentworkon interest-rate
the
model
consistent
monetary
in
as
and
Gertler
rules,
Clarida,Gali,
(1999).This changeis of crucial
in
how
one
the
importance
interprets Phillipscurve(see Clarida,Gali,
and Gertler,1999),but has no qualitativeeffect
on our basic argument
abouttheinteraction
ofthefiscaland monetary
authorities.
Itis assumed
thatpricesare stickyin theshortrun,whichallowsmonetary
policyto
have short-run
effects.
Outputconsistsofpublicgoods determined
by theincumbent
politician (as explainedbelow) and all othergoods; as shorthand,we term
cannotdetermine
The
nonpolitical
goods thosethatthepolitician
directly.
supplyofpublicconsumption
goods is givenby
(13)
gt = E - kt+l,
where E is the competence

of the Presidentcurrently
in office.A more
leader
is
a
better
economic
able
to
increasea councompetent
manager,
level
of
is
a
characteristic
of a leader,
try's
output.Competence
given
whichin thistwo-periodsetupis equivalentto thefirst-order
movingassumedby Rogoff.Leaders are of two types:high
averagestructure
competence (EH) and low competence (EL <
EH).
Competence E is not
observedby thevoters;in theabsenceofanyinformation,

theyassigna
0
1
a
to
leader
of
whereE =
probability < y <
being highcompetence,
+
yEH (1 y)EL.
The public-goodsconstraint
is written
in thiswaytohighlight
thefact
thatforpubliccapitalto be purchasedin period t+1, fundsmustbe
allocatedin periodt.19Hence,thoughthedecisionon publicinvestment
is made at t,itonlyentersaggregatedemandin t+ 1. Moreover,though
kt+1is chosenin periodt,itis onlyobservedin periodt+ 1.
we assumethatdemandfor
literature,
Followingthemonetary-policy
nonpolitical
goods (relativeto potentialoutput)is a decreasingfunction
oftheex anterealinterest
ratewitha stochastic
termz,thatis, itis X(it+
We
may thenwritethe outputgap as a functionof the
Et'rt+1) zt.
interest
rate(the"IS curve"):
xt = X(i, - Etrt+l) + kt-1+ gt + zt - E.
(14)
In derivingthemonetary
interest-rate
rule,we willconsidera
authority's
linearversionof(14):
19. Multiplying
ratetorepresent
thecostofcarrydoes not
k,,,byone plustherealinterest
butmakesthecalculations
moredifficult.
changethebasicresults,

104- DRAZEN
Xt = - p(it -
Et,+,,I)
(15)
+- ~,
where p > 0 and qt = k,_1+ gt + Zt- E.
ANDFISCALPOLICY
9.3 THEPRESIDENT
Itis assumedthattheincumbent
of
presidentcontrolsthedetermination
and
k.
The
cares
about
the
is,
public(that political)goods g
president
socialwelfareofall voters.Giventheformoftheutility
function
(10) and
the factthatvotersdon't hold the presidentdirectlyaccountablefor
the single-period
voterwelfaremeasure
macroeconomic
performance,
lossoverallvoters
he maximizesis thesumof(negative)macroeconomic
+
are affected
the
of
voters
who
fraction
by
plus g v(k)multipliedby
This
as
be
written
objectivemay
public-goodsupply.
U()
= -
((Xt-
--
(t
) +n[gt + v(kt)],
(16)
and 0 < n < 1 is the

wherea is theaveragevalue ofa' overtheelectorate
of
ofvotersaffected
fraction
byprovision politicalgoods.
The incumbenthas two additionalargumentsin his objectivefunction.First,as in Rogoff,he attachesa value to beingin officeper se,
whichwe denoteby 9. Second, he may tryto influencethe central
consistentwiththe disbank's choiceof monetarypolicy;specifically,
cussionin theprevioussection,an incumbent
maypressthemonetary
in
low
an
election
interest
rates
to
year,whichhe may
authority keep
or
to
value forre-election
satisfyimportantconstituencies.
purposes
is
modeled
the
second
Here,
looselyby assumingthatvotersvalue
than
themonetary
more
economicactivity
[seeequation
authority
highly
in an election
totheincumbent
therefore
(18)below],whichis
important
on
ofitseffect
year.However,applyingpressurehas a costindependent
reflect
the
interestratesor otherobservablevariables.This cost may
or,
authority
psychiccoststo theexecutiveoftensionwiththemonetary
fromthemonetary
thecostofreducedcooperation
morelikely,
authority
in the future.The cost dependson thewhole natureoftheinteraction
and theelectedpresident,
betweenthemonetary
includingthe
authority
to withstandsuchpressures.Fornow,
authority
abilityofthemonetary
we simplywritethecostofsuchpressureas 4, whereS is increasingin
theamountofpressureapplied.
An incumbent's
maythenbe written
expectedutility
IO
= E1v +
2
t=1
3tt-1qt(0-
),

(17)
Business
25 Years 105
ThePolitical
Cycleafter
?
where q, is the probabilityof being in officein period t, and QV is obtained from UV in (16) via (11). For an incumbent,q, = 1; q2 will be
derived below. Equation (17) makes clear thatsince an incumbentplaces
a value on being in office,he will be opportunisticand tryto manipulate
the economy to improve his re-electionchances, but there are limitson
how farhe is willingto go.
In our model manipulation takes two forms.First,and most importantly,there is directmanipulationvia fiscalpolicy (choice of g), where
concern for social welfare puts a limiton the degree of manipulation.
Second, he may put pressure on the centralbank to lower interestrates,
but thereare costs of doing so, as summarized by ?. For simplicity,it is
assumed that the incumbent knows that fiscal policy affectsinterest
rates but does not know exactly how the monetaryauthoritywill respond and thereforedoes not take into account the effectofg on interest
rates in choosing his preferredvalue. This assumption,which simplifies
the mathematicalanalysis, seems realisticand has no substantiveeffect
on the nature of the results.
9.4 ELECTORALSTRUCTURE
The electoral structureis as follows. For simplicity,there are only two
periods, with an election at the end of the firstperiod. In the firstperiod
the incumbentobserves E and chooses g, and k2.Votersobserveg, and il
(but not E or k2)and use these observationsto forman inferenceabout
competence. Based on theirbeliefs about competence, they then vote
whether to retain the incumbent or replace him with a challenger of
unknown competence, so that the expected competence of the challengeris i. More specifically,the voterschoose to retainthe incumbentif
expected utilityunder the incumbent is higher than expected utility
under the challenger.20In the second period, the elected president
chooses his first-best
policy,as thereis no election.
9.5 THE MONETARYAUTHORITY
We assume thatthe centralbank's objectivefunctioncan be represented
by the loss function(2) (which also representsthe loss that individuals
20. An alternativeassumptionis thatthe incumbentchooses g, before
Eis observed, so there
is no signaling of type. Suppose that output, which is observed by voters before an
election, is the sum of competence E and a random shock, both unobserved. Hence,
when a high level of output is observed, optimal inferencewould lead votersto raise
the probabilitythat the incumbentis of high competence, and thereforemake them
more likelyto vote to re-electhim. Incumbents,knowing this, are induced to increase
government expenditures before an election. One would thereforeobtain a preelectoralfiscalcycle,with all competencetypesraisingspending beforean electionand
votersvotingon the basis of good economic times,but withoutsignaling.

106 - DRAZEN
butthatthecoefficient
on outputdeviaassigntoaggregatefluctuations)
need notbe the
tionsorthetargetlevelsfortheoutputgap and inflation
loss
letthecentralbank'ssingle-period
sameas thepublic's.Specifically,
function
be
2
CB
=(Xt_,)2
))2
(1
whereoa < &, thatis, the monetaryauthority

assignsa greatercostto
thanthe"average"voter,as well as possiblyhavfluctuations
inflation
Thoughthereis considerable
inglowertargetsforoutputand inflation.
researchaimed at derivingthe centralbank's objectivefromthe utility
oftherepresentative
function
agent,thewholeconceptofa policymaker
a
of
the
agentmissesthe essence of
representative
maximizing utility
models.
Furthermore,
using a loss functionsuch as
political-economy
and
the
literature
on monetary
the
PBC
literature
follows
both
(18)
policy
and
Gertler
for
rules[see, example,Clarida,Gali,
(1999)and thediscussion therein],
makingiteasierto compareresultsfromthoseliteratures.
choosesxtand r1tominimizeitsloss function
The monetary
authority
subjectto the aggregatesupplyrelation(12) and the shocksstand t,.
(See the appendixfora derivationof optimalpolicy as well as the
interest-rate
(18) subjectto (12), and using(15) to
rule.)Bymaximizing
derivethe nominalinterestrate,one obtainsthe monetaryauthority's
rule:
optimalinterest-rate
=
it
1 +-
Etrt+1+- qt,
(19)
whereEt Tt+1= pstand itis assumedthatthisrulewillbe followedin the

future.This rule gives the first-best
responseto supplyshocksstand
demandshocksqr.21Weconsiderbelowhowpressurefromtheexecutive
ruleimplyinga
to followa different
mayforcethemonetaryauthority
to
shocks.
smallerinterest-rate
response
To close the monetarysector,the money-supply
growthrateconsisthe
is
tentwiththeinterest-rate
equilibmoney-market
target givenby
riumcondition(theLM curve)whenthepricelevelis stickyin theshort
run.In theabsenceofmoneydemandshocks,we obtaina simplerelationbetweenmoneygrowthand interest
rates,namely,
withtheTaylorrule
21. As Clarida,Gali,andGertler
(2000)pointout,thisruleis consistent
and theoutputgap is
oflaggedinflation
ora linearcombination
whenlaggedinflation
withinflation
Itis also consistent
future
inflation.
to forecast
sufficient
targeting.

ThePolitical
Business
25 Years- 107
Cycleafter
L,
(20)
M(it,xt)
function
of
where,givenxt,themoneygrowthratewillbe an increasing
theinterest
rate.We assumethatthemoney-supply
growthrateis conunobservedby voters.Thispreventsthemfromusing
temporaneously
interestratesand monetarygrowthratestogetherto inferthe competenceofthepresident.
9.6 EQUILIBRIUM
FISCALANDMONETARY
POLICYUNDER
FULLINFORMATION
We beginwiththebenchmark
full-information
wherevotequilibrium,
erscan observeEbeforevoting.IfEis observed,pre-electoral
fiscalpolicy
can haveno effect
on theelectionoutcome.Takingq2as givenin (17),the
incumbent's
decisionproblemovergtand ktbecomesequivalenttomaximizingthevoters'utilityUV.Usingthesimplifying
assumptionthatthe
ofg on interestratesin
presidentdoes not takeintoaccountthe effect
condition:
value,one obtainsa first-order
choosinghispreferred
p3v'(k)? 1,
(21)
withequalityifE (v')-f(1/13).
If Eis sufficiently
large,thenbothpublic
- and (21)holdsas an equality.We assumethatEL(and
goodsaresupplied
hence EH) is high enoughthatthisis the case. First-best
government
and consumption
investment
are then
k*= (v')-
(1/3),
g*(Ei) = Ej - k*,
(22)
forj = L, H. Thisis thepolicyalwayschoseninthesecondperiod(when

thereis no election),and itis thepolicychosenin thefirst
periodunder
fullinformation.
is
in
that
so
voter
E,
Clearly,g* increasing
utilityis
in
as
well.
increasing e
To findmonetary
policyin a nonelection
year(or underfullinformaknows(22),thatis, thatit
tion),we assumethatthemonetary
authority
knows thatthereis no electoralmanipulationin a nonelectionyear.
Combining(22) with(19) and (20), one findsthattheinterestrateand
moneygrowthratewillbe the same underlow-and high-competence
in nonelectionyears,dependingonly on aggregatedepolicymakers
mandand supplyshocks.
9.7 FISCALPOLICYUNDERASYMMETRIC
INFORMATION
We now considertheincumbent
politician'sdecisionproblemwhenhis
is
not
observed.
In
this
sortofsignaling
thereisgencompetence
problem,

108- DRAZEN
erally a multiplicityof equilibria,both separating and pooling. We consideronlypure strategies,and assume thatvotersare sufficiently
sophisticated thattheyrule out incumbentsfollowingdominatedstrategies.This
leaves only one separatingequilibrium,on which we focus.22(Of course,
the welfarethe low-competencetypegetsin a pooling equilibriumwill be
importantin derivingtheseparatingequilibrium.)We show thatin a separating equilibrium,the low-competence type chooses his full-informasolution,while the high-competencetypesignals his type
tion, first-best
optiby choosing public consumptiong higherthan the full-information
mum (at the expense of low public investment,which is contemporaneously unobserved). The effecton interestrates depends on the choice of
gt,which is perceived by the centralbank as a demand shock, and on the
pressurethe presidentis able to put on themonetaryauthority.High preelectoralgovernmentconsumptioncombined with effectivepressure on
the monetaryauthoritywill be seen in high money growthrates, even
though it has no causative effecton the pre-electoralexpansion.
voters'beliefsabout competenceare a
Under asymmetricinformation,
functionof the observed fiscalpolicy.(The level of interestrateswill give
no additional information,given the unobservabilityof the money
growthrate.) We representthese beliefsas j'(g), which is theprobabilitya
voterassigns to theincumbentbeing ofhighcompetence,giventheobservation of fiscalpolicy.These beliefsin turndeterminethe probabilitythat
an incumbentis re-elected.Given Equation (19), interestrates are determined byg and theincumbent'stypeas given above, so thatwe maywrite
the incumbent'sexpected utilityas a functionofhis chosen policyand his
type as Qf(g, (g),e).
To derive the equilibrium,we work backwards. In the second period,
both competence types choose the fiscalpolicy according to (22), with
governmentconsumptiong being higherunder a high-competencethan
a low-competence type. Given the first-bestfiscal solution, the central
bank can meet both of its monetarytargets.Voterswill thereforealways
re-electan incumbenttheybelieve to be of high competence [q2( =- 1)
1] and vote to remove an incumbentthey believe to be of low compe= 0) = 0]. When there is no informationabout the competence
of the incumbent (for example, in a pooling equilibrium where
tence [q2(j/
both types chose the same policy), so thatthe incumbentis assumed to
be of average competencey, it is assumed thatthe probabilitythathe is
re-elected is positive, but less than one [0 < q2(y' = y) < 1], for the
reasons discussed in footnote18 above.
22. In this sort of model, pooling equilibria are generally ruled out by the Cho-Kreps
"intuitive"criterion.See the discussion in Rogoff(1990).

ThePolitical
Business
25 Years- 109
Cycleafter
In the firstperiod in a separatingequilibrium,a low-competencetype
chooses his full-information
optimum,since he gains nothingfromchoosa
ing distortionary
public-expenditurecombinationthatyields less utility
but stillallows votersto deduce his type. A high-competencetype must
thereforechoose a policy that the low-competencetype chooses not to
mimic.More specifically,denote the policy of the high-competencetype
in a separating equilibriumby gH, with an associated nominal interest
rate. In orderforthe low-competencetypenot to mimicthe high-competence type, he must receive lower utilityfrom mimickingthe highcompetencetypethanfromrevealinghimself.(In thecase ofequal utility,
we assume thatthe low-competencetypechooses to reveal himself.)We
thus requirein a separatingequilibriumthat
f2P(g,(g,)
= y;EL) .5P(g*
(EL),0;EL).
(23)
That is, in a separatingequilibrium,gH (and the associated interestrate)

is such that a low-competenceincumbentwould ratherchoose the fullinformationsolution and be revealed (and hence defeated forsure) than
choose to mimic the spending level gH with the implied low level of
public investment.In such a pooling equilibrium the low-competence
type must put enough pressure on the centralbank to hit the interest
rate iH that the high-competencetype achieves, which is possible ifthe
monetaryauthoritychooses a high enough (unobserved) money growth
rate. That is, the high-competencetypemust choose a high enough level
ofgH thatthe low-competencetype chooses not to mimic.
One possibility is that the high-competencetype's full-information
level of expenditure, namely g*(EH), satisfies (23). That is, the highcompetence type can separate himselfby choosing his first-best
point,
because it is such that the low-competence will not find it optimal to
adopt it. This would be the case, forexample if the value O of being in
officewere low. In thatcase the distortionthata low-competenceincumbent would have to undertake to match the high-competencetype's
nondistortionarysolution would not justifythe (low) value of winning
reelection.Anothercase in which g*(EH) would be a separatingequilibrium is where the differencebetween EH and EL is very large, since it
would be too costly for the low-competence type to adopt the highcompetence type's first-best
policy.
When g*(EH) does not satisfy(23), thenthehigh-competencetypemust
choose a point which gives him less utilitythan g*(EH) in order to separate himself.Since the cost to the high-competencetype of signalinghis
typeis higherforhighergH relativeto g*, he will choose the lowest level
ofg' consistentwithseparation. (That is, he will choose an undominated

110-DRAZEN
This value is givenby the value ofgH thatsatisfies(23) with
strategy.)
equality.
A further
conditionfora separatingequilibriumis thatgHmustgive
exthehigh-competence
typeutilityno lowerthanthefull-information
penditurelevel g*(EH) gives him, thatis,

'P (gH"1;EH")
" ",(g*(EH)
/,(g*(EH))
y;EH).
(24)
mustsatisfy
both(23) and (24). One mayshow
A separating
equilibrium
exists.
thatsince EH > EL and v(-) is concave,a separatingequilibrium
the low-competence
(See Drazen,2000b.)In such an equilibrium,
type
first-best
levelofexpenditure,while
choosesg*(EL), his full-information
a high-competence
type chooses a level of expendituregH just high
that
the
low-competence
typedoes notfinditoptimalto adopt
enough
thatpolicyinsteadofhis first-best
policy.
therewillbe manydifferent
Morerealistically,
types,with
competence
all but the least competentchoosinga level of expenditureabove his
and Sibert
level.[See Rogoff
first-best
optimumto signalhiscompetence
a
of
with
continuum
of
this
of
for
the
derivation
(1988)
type equilibrium
of
of
some
Hence,
manipulation
degree pre-electoral
competencetypes.]
fiscalpolicywillbe theruleratherthantheexception.
ofthepoliticalfiscalcycle.
We maythensummarizethecharacteristics
Beforean election,a highlevelofspendingsignalsan high-competence
tobe reso thata highlevelofspendingleads theincumbent
incumbent,
electedby rationalvoters.This high level of spendingmaybe either
(ifit does not).
[ifg*(EH)satisfies(23)] or distortionary
nondistortionary
thecentralbankwillpartially
Whentheoptimalsignalis distortionary,
theimpactoffiscal
accommodatehighgovernment
spendingto restrain
on
rates.
interest
Hence,
moneygrowthwill risebeforean
expansion
butinresponsetoexpannot
affect
economic
to
election,
activity
directly,
fiscal
policy.
sionary
POLICYIN ANELECTIONPERIOD
9.8 MONETARY
In a nonelection
periodall competencetypeschoosefiscalpolicyaccordofcompetence;
demandstimulusis independent
the
so
to
and,
ing (22),
as was arguedabove,themonetary
monetary
polauthority's
preferred
by (19),is independentofcompetenceas well.Moreicy,as determined
over,thereis no reasonfora politicianto putpressureon themonetary
neitheroftheseconditions
forelectoralpurposes.In contrast,
authority
need hold in an electoralperiod.
As arguedin the previoussection,in an electionperiod,the hightype in a model of
competencetype (all but the lowest-competence

25 Years- 111
ThePolitical
Business
Cycleafter
manytypes)willchooseto signal,and thismayrequirechoosinga level

ofpublicconsumption
g, abovethefirst-best
optimum.Iftherearemany
competencetypeswithtwo adjoiningtypeshavingvalues of E not far
fromone another,thensignalingwillalmostcertainly
requireincreasing
g1abovethelevelgivenin (22).
react?In theabsenceofanyknowlHow willthemonetary
authority
an increaseing inan electionperiod
edge ofthepresident'scompetence,
is seen simplyas a demand shock %, whichthe monetaryauthority
rateaccordingto
wouldwantto offset
thenominalinterest
byincreasing
(19). However,when the "average"voterprefershigherand less variable outputthanthemonetary
an incumbent
authority,
presidentgains
votes by limitingthe increasein the interestrate,implyingthatthe
equilibriumoutputgap is below whatthemonetary
prefers.
authority
Note thatthisis trueeven ifthepresidentsharesthemonetary
authoroveraggregatevariablesin (18), as long as thevoters
ity'spreferences
have different
preferences.
To makethisprecise,one has to specifyhow muchpressurethepresident puts on the monetaryauthority
and how thisis translatedinto
limitations
on interest
rate.Thereare severalwaysofmodelingthis.For
takestheformofinducingthe
simplicity,
supposethattheintervention
to reduceproportionally
the responseto demand
monetaryauthority
shocks(whichmeansaccommodating
thefiscalstimulusoftheincumbent, among otherthings),thatis, to choose the interestratein the
electionperiodaccordingto
it
1+
Etw+?+ (1 - w)- nt,
(25)
for0 - w 1 chosenbytheincumbent
The higherw is, the
president.23
is
the
incumbent's
An
cost
will
incumbent
choosew optimally
4.
greater
on
the
nature
of
the
cost
of
relative
totheweighthe
depending
pressure
on
welfare
Interest-rate
will
intervention
limitthe invoters'
puts
Dv.
creasein interestratesin responseto fiscalshocksand henceincrease
whichis preferred
outputabove whatthe monetaryauthority
prefers,
the
voters.
The
effect
of
will
this
by
aggregate
dependon thesize ofthe
fiscalstimulus.Ifitis targetedto a narrowgroupofvoters(thatis, ifn,
thefraction
ofvoterswho are affected
byhigherg, is small)orifthesize
23. Fromthe monetaryauthority'soptimizationproblem,itis clear thateven withintervention, conditions(A2) and (A3) in the appendix stillhold. Since the monetaryauthority
rule in period 2, (25) gives the response of
expects to be allowed to followthe first-best
interestrates to shocks when the monetaryauthorityknows thatits reactionis limited
in the way it is.

112- DRAZEN .
of the fiscalstimulusis small relativeto the economy,therewill be little
or no aggregateeffect.If it is large, as in some of the developed-country
cases discussed in Section 8, theremay be a large aggregateeffect.
The effecton money growthrates is obvious. The more pressure the
incumbentputs on the monetaryauthorityto keep interestrates from
rising,the higher must be money growth relative to the monetaryauIn the case of w = 1, interestrates don't rise at all in
thorities'first-best.
response to a fiscal stimulus, so that the money growth rate must increase beforethe election. Of course, this depends on the existenceof a
fiscalstimulus. In its absence, thereis no higher-than-averagepressure
on interestrates and hence no need fora monetaryaccommodation of
the politicallyinduced fiscalstimulus.The possibilityof accommodation
in response to pressure, its implications for monetarypolicy, and its
connection with the fiscal stimulus contain the essence of the AFPM
model of the PBC.
10. A Lookat theDataandSomeConcluding

Comments
We now take a quick look at the data to show that they are broadly
consistentwith the model. A clear differencebetween a money-based
PBC model and the AFPM model is thatin the former,monetaryeffects
are the drivingforceof the political-economic cycle, while in the latter
theyare induced effects,due to the monetaryauthoritywantingto offset
fiscaleffectsthatwould otherwisedriveup interestrates. Hence, money
growthin a money-drivenPBC model should be expansionaryand drive
down interestrates, while in the AFPM model it should be associated
with stable or even slightlyrising interestrates. Put another way, the
monetaryexpansion in a money-drivenmodel should be reflectedin
changes in the instrumentsof monetarypolicy in an expansionarydirection, while in the AFPM world, we should see an expansion only in
broad monetaryaggregates, not in instrumentsof policy. This type of
argumentwas firstput forwardby Beck (1987), as discussed in Section 8
above. He found that the opportunisticmonetarygrowth cycle from
1960 to about 1980 was characterizedby this distinction,and in regressions such as (4) he found no political effectson the fed funds rate to
matchthe M1 politicalcycle.This distinctionis summarizedby the difference between the money growthover a president'stermin Figures4 and
5 and by the federalfundsrateshown in Figure6, where thereis no clear
politicaleffect.24
24. In fact,in the post-1979period, the fed funds rate actually rises in the quarterbefore
the election.

Business
ThePolitical
25 Years- 113
Cycleafter
A second broad prediction of the AFPM model is that monetary
growthbeforean electionshould reflectfiscalimpulses. Note thatone is
nottestingwhetherfiscalmanipulationor voters'responses are rational,
but whether there is a causal connection between the fiscal and the
monetarycycle. As reportedin Section 6, both Keech and Pak (1989) and
Alesina (1988) found an electoral cycle fortransfersbetween 1961 and
the late 1970s or early1980s,which has since disappeared. The strongest
evidence foran Mi-growth-rateelectoralcycle is over the same period,
while thereis no such cycle after1980.
Of course, correlationis not causation. A strongertest is to show
whetherwhen an electoralmonetarycycle exists,it can be explained by
the fiscal cycle, as opposed to simply a political dummy. Beck (1987)
performssuch a test and argues that fiscalvariables can in factexplain
the 1960-1978 electoral cycle in M1 growthrates. In Drazen (2000b), I
presentregressionresultsthatshow a money growthcycleover thistime
period (but the absence of a federal-funds-rate
cycle) and an electoral
in
and
both
net
to
transfers
GNP
the
ratio
of the fiscal surplus to
cycle
GNP over the same period.25Moreover, when the ratio of the fiscal
surplus to GNP is included as an explanatoryvariable in the money
growthregressions,the politicaldummyto captureelectoraleffectsloses
much of its significance.
A broader question is whetherthereis significantevidence of an opportunisticPBC in the aggregate data for the United States. On the
whole, the evidence is not strongfor effectson many macroeconomic
aggregates.A key point of the AFPM model is thattherecan be a significant electoral cycle in policy instruments
-significant in that it affects
there
clear
voting-without
being
aggregate implications. "Traces" of
effects
that
are
observed
monetary
may be simply an attemptby the
centralbank to aim foran absenceof aggregate effectsthatcan be attributed to monetarypolicy!Of course, ifthe fiscalmanipulationis large, as
is the case in some developing countries,we should expect to see large
aggregateeffects.
Though the empiricalfindingsare only suggestive at this point, they
should, at the very least, induce us to rethinkour approach to PBCs.
This paper was in part survey and in part new research induced by
consideringwhat we have learned fromtwenty-five
years of researchon
PBCs. The surveywas meant to convey a veryclear message: monetary
25. One interestingresultin this regard is thatin the 1960-1978 sample, thereappears to
be a significantpositive effecton money growthin the electionquarteritself,which is
too late if monetarypolicy is meant to increase economic activitybefore the election.
On the other hand, if monetarypolicy is counteractingthe effectsof fiscalpolicy on
interestrates,the timingis not puzzling.

114*DRAZEN
surprises are an unconvincing driving force for political cycles, either
opportunisticor partisan;researchshould concentrateon fiscalpolicy as
the drivingforce,especially foropportunisticcycles. Politicalmonetary
cycles are more likely the effectof accommodation of fiscal impulses,
thatis, monetarypolicy is passive while fiscalpolicy is activein tryingto
affectelectionoutcomes.
Derivation
Rules26
ofInterest-Rate
Appendix.
The monetaryauthorityminimizesa loss function
Ur- + -+Ft,
(Al)
where F, representsfutureexpected loss frominflationand output, subject to (12). This yields an optimal relationbetween x, and 1rTof the form
Xt=
1
-
(A2)
t.
Combining this conditionwith the aggregate supply curve (12) and imposing rational expectationsyields x, and r as functionsof the supply
shock st,namely,
Xt= hst,
rt= -o*hst,
(A3)
= pstand h = [1 + o-(1- p)]-'. The optimalinterest-rate

rule
where Etrrt+1
then follows fromsubstitutingthe desired value of xtinto the linearized
aggregatedemand relation(15) to obtainthe nominal interestrateconsistentwith the output target,which is equation (19).
REFERENCES
Alesina,A. (1987).Macroeconomic
systemas a repeated
policyin a two-party
102:651-678.
Economics
Journal
of
Quarterly
game.
and Politics.In NBERMacroeconomics
. (1988).Macroeconomics
Annual,
MA: The MIT Press.
Fischer,
(ed.).
Cambridge,
Stanley
, G. Cohen,and N. Roubini.(1992).Macroeconomic
policyand elections
4:1-30.
andPolitics
in OECD democracies.Economics
democ. (1993).Electoral
businesscyclesin industrial
and23:1-25.
racies.European
Journal
Economy
ofPolitical
26. Following Clarida, Gali and Gertler(1999).

ThePolitical
Business
25 Years 115
Cycleafter
?
, and N. Roubini. (1992). Politicalcycles in OECD economies. Reviewof
Economic
Studies
59, 663-88.
-, Cam, and G. Cohen. (1997). PoliticalCyclesand theMacroeconomy.

bridge MA: The MIT Press.
Alt, J.,and A. Chrystal. (1983). PoliticalEconomics.Berkeley,CA: Universityof
CaliforniaPress.
Ames, B. (1987). PoliticalSurvival.Berkeley,CA: Universityof CaliforniaPress.
Arcelus,E, and A. Meltzer. (1975). The effectof aggregateeconomicvariableson
congressional elections.AmericanPoliticalScienceReview69:1232-1239.
Beck, N. (1987). Electionsand the Fed: Is therea politicalmonetarycycle?Ameri-
canJournal
Science
31:194-216.
ofPolitical
Ben-Porath,Y. (1975). The years of plenty and the years of famine-a political
business. Kyklos28, 400-403.
Block,S. (2000). Politicalbusiness cycles,democratization,and economic reform:
The case of Africa.Medford,MA: FletcherSchool, TuftsUniversity.Working
paper.
Bloom, H., and H. Price. (1975). Voter response to short-runeconomic conditions: The asymmetriceffectof prosperityand recession. AmericanPolitical
ScienceReview69:1240-1254.
Brender,A. (1999). The effectof fiscalperformanceon local governmentelection
results in Israel: 1989-1998. Bank of Israel Research Department Discussion
Paper 99.04.
Chowdhury, A. (1993). Political surfingover economic waves: Parliamentary
electiontimingin India. AmericanJournal
ofPoliticalScience37:1100-1118.
Clarida, R., J. Gali, and M. Gertler.(1999). The science of monetarypolicy: A
new Keynesian Perspective.Journal
37:1661-1707.
ofEconomicLiterature
. (2000). Monetarypolicy and macroeconomicstabil-, , and JournalofEconomics116:147-180.
ity:Evidence and some theory.Quarterly
Dixit, A., and J.Londregan. (1996). The determinantsof success of special interests in redistributivepolitics.Journal
ofPolitics58:1132-1155.
Drazen, A. (2000a). PoliticalEconomyin Macroeconomics.
Princeton,NJ:Princeton
UniversityPress.
-. (2000b). The AFPM model of the political business cycle: Theory and
evidence. Universityof Maryland. WorkingPaper.
Fair, R. (1978). The effectof economic events on votes forpresident. Reviewof
Economics
andStatistics
60:159-172.
. (1982). The effectofeconomic eventson votes forpresident:1980results.
Review
andStatistics
64:322-325.
ofEconomics
-. (1988). The effectsof economic events on votes forpresident: 1984 update. PoliticalBehavior10:168-179.
Faust, J.,and J.Irons. (1999). Money, politics,and the post-war business cycle.
Economics
43:61-89.
Journal
ofMonetary
Garfinkel,M., and A. Glazer. (1994). Does electoraluncertaintycause economic

fluctuations?AmericanEconomicReview84:169-173.
Gonzalez, M. (1999a). On elections, democracy and macroeconomicpolicy cycles. Departmentof Economics, PrincetonUniversity.WorkingPaper.
. (1999b). Politicalbudget cyclesand democracy:A multi-country
analysis.
Departmentof Economics, PrincetonUniversity.WorkingPaper.
Grier,K. (1989). On the existenceofa politicalmonetarycycle.American
Journal
of
Political
Science
33:376-389.

116 - DRAZEN
Hibbs, D. (1977). Political parties and macroeconomicpolicy. AmericanPolitical
ScienceReview71:1467-1487.
. (1992). Partisan theory afterfifteenyears. EuropeanJournalof Political
Economy8:361-373.
-. (1994). The partisan model of macroeconomic cycles: More theoryand
evidence forthe United States. Economicsand Politics6:1-24.
Ito, T. (1990). The timing of elections and political business cycles in Japan.
JournalofAsian Economics1:135-156.
Kalecki, M. (1943). Politicalaspects of fullemployment.PoliticalQuarterly7:322331.
Keech, W., and K. Pak. (1989). Electoralcycles and budgetarygrowthin veterans' benefitprograms.AmericanJournal
ofPoliticalScience33:901-911.
Kramer,G. (1971). Short-termfluctuationsin U.S. voting behavior, 1896-1964.
AmericanPoliticalScienceReview65:131-143.
Krueger,A., and I. Turan. (1993). The politics and economics of Turkishpolicy
in EconomicPolicy
reformin the 1980's. In Politicaland EconomicInteractions
EvidencefromEightCountries,R. Bates and A. Krueger,(eds.). Oxford:
Reform:
Basil Blackwell.
Lewis-Beck, M. (1988). Economicsand Elections.Ann Arbor:Universityof Michigan Press.
Lindbeck, A. (1976). Stabilizationpolicy in open economies with endogenous
66:1-19.
politicians.AmericanEconomicReviewPapersand Proceedings
Madsen, H. (1980). Electoraloutcomes and macroeconomicpolicies: The Scandinavian cases. In Models ofPoliticalEconomy,P. Whitely,(ed.). London: Sage,
pp. 15-46.
McCallum, B. (1978). The political business cycle: An empirical test. Southern
42:504-515.
EconomicJournal
McRae, D. (1977). A political model of the business cycle. Journalof Political
Economy85:239-263.
Nordhaus, W. (1975). The political business cycle. Reviewof EconomicStudies
42:169-190.
Okun, A. (1973). Comments on Stigler'spaper. AmericanEconomicReview63:172177.
Paldam, M. (1979). Is there an electoralcycle? A comparativestudy of national
accounts. ScandinavianJournal
ofEconomics81:323-342.
Rogoff,K. (1988). Comment on "Macroeconomics and Politics." In NBER Macroeconomics
Annual,StanleyFischer,(ed.). Cambridge MA: The MIT Press.
---.
(1990). Equilibrium political budget cycles. AmericanEconomicReview
80:21-36.
Rogoff,K., and A. Sibert. (1988). Elections and macroeconomicpolicy cycles.
ReviewofEconomicStudies55:1-16.
Schuknecht,L. (1996). Politicalbusiness cycles in developing countries. Kyklos
49:155-170.
and Statistical
Historical,
AnalySchumpeter,J.(1939). BusinessCycles:A Theoretical,
sis oftheCapitalistProcess.New York:McGraw-Hill.
Sheffrin,S. (1989). Evaluating rationalpartisanbusiness cycle theory.Economics
and Politics1:239-259.
Shi, M., and J. Svensson. (2000). Political business cycles in developed and
developing countries.The World Bank. WorkingPaper.

117
Comment.
Stigler,G. (1973).Generaleconomicconditionsand nationalelections.American
EconomicReview63:160-167.
of theoutcomesofmidterm
elecTufte,E. (1975).Determinants
congressional
tions.American
Political
Review
Science
69:812-826.
. (1978).Political
Control
Princeton,
NJ:Princeton
oftheEconomy.
University
Press.
Politics:
TheFederal
Reserve
andthePolitics
Woolley,J.T.(1984).Monetary
ofMoneUK: CambridgeUniversity
Press.
taryPolicy.
Cambridge,
Comment
ALBERTOALESINA
HarvardUniversity,
NBER,and CEPR
1. Introduction
The purpose of Allan Drazen's fine paper is twofold: (1) to assess the
literatureon political business cycles, and (2) to provide a new model
thatcombines monetaryand fiscalpolicies as drivingforcesof opportunisticcycles. I will focus,as a discussant is supposed to do, on the points
of disagreement.
Let me begin by notingthatone should not expect thateveryelection
will create the same predictablepatternof policy choices. Some governmentsmay use monetaryinstrumentsto achieve partisanor opportunist
goals, others may use the fiscal instruments.Initial conditions may
matteras well: in certaincases showing fiscalrestraintmay be a political
plus, while fiscal expansions in election years may be punished. For
instance Alesina, Perotti,and Tavares (1998) show thatvoters in OECD
countriesdo not always reward governmentsthatare fiscallyexpansionary. Alesina (2000) discusses the complex political economy of the
currentU.S. budget surplus. Spending more or taxing less in election
years is only one of many aspects of the politics of fiscalpolicy.Drazen
writesthat"the relianceon monetarypolicy as the drivingforceof cycles
is inconsistentwith the evidence on the importantrole of fiscalpolicy."
Why? I do not understandwhy it has to be one or the other.This fiscalvs.-monetary"horse race" is a bit distractingfromthe main issues in this
whetheropportunisliterature,namelywhethervotersbehave rationally,
tic behavior is important(and in which countriesand in which political
systems),whetherpartisanmotivationswere and are stillstrong,which
electoralsystemsare more or less prone to create cycles,what influence
the degree of central-bankindependence can have, what are the different issues arisingin developed and developing countries,etc.


The Political Business Cycle After 25 Years - Allan Drazen

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

The Political Business Cycle After 25 Years - Allan Drazen

Загружено:

Авторское право:

Доступные форматы

The National Bureau of Economic Research

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

wherextis thedeviationofactualfrompotentialoutputand wherethe

yieldingthe numberof votes Nt as a functionof voters'swell-being,

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

the speed with

and irtto maximizehis expectedvote in the nextelection.This

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

where Y is an outcome variable such as GDP, the Xj are othereconomic

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

model. For example,as a testof the

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

theelection,and 0 otherelectionquarterand in the3 quarters

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

In manyOECD countriesthereis a clearpostelectoral

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

forpartyj, where i1ris partyj's targetrateofinflation,.j is partyj's target

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM

forpartyj, where i?7and ?j are the partisantargets,ai is the relative

This content downloaded from 152.118.148.226 on Thu, 6 Nov 2014 05:21:42 AM