Political Business Cycles
Rational voting

In `opportunistic' models of the political business cycle, policy-makers maximize their popularity or the likelihood of re- election, while in `partisan' models, they represent the interests of different constituencies and follow different policies in office. Specifically, the left is assumed to be more unemployment-averse and less inflation-averse than the right. In `rational' versions of these models, economic agents and voters are assumed to have rational expectations and to understand correctly the partisan and opportunistic goals of the politicians.

In Discussion Paper No. 470, Research Fellows Alberto Alesina and Nouriel Roubini seek to assess whether movements in output growth, unemployment and inflation are systematically affected by the timing of elections and changes of government by testing versions of all these models against quarterly economic data for 18 OECD democracies over the last three decades. They also test whether economic conditions influence the timing of elections for countries in which the incumbent government is able to choose the election date.

Alesina and Roubini find that the data reject Nordhaus's opportunistic political business cycle model for all the countries except Germany and New Zealand and reject the opportunistic political business cycle model with endogenous timing of elections for all except Japan. The inflation rate generally follows an electoral cycle consistent with `rational opportunistic' models. The data are also broadly consistent with the predictions of `rational partisan' models for countries with clearly identifiable changes of regime from left to right and vice versa, but such models tend to fail for countries with coalition governments, frequent early elections and regular coalition reshuffles.

These findings account for the political business cycle that seems to appear fairly consistently in several countries. Left- wing governments expand the economy when first elected and succeed for about two years, when expectations of inflation adjust and the economy returns to its natural rate of growth. Such governments are then trapped in a high-inflation equilibrium and may find it hard to disinflate for reasons of credibility, although they may try to do so before the next election if the electorate perceives inflation to be the main economic problem. In contrast, when right-wing governments are elected they fight inflation; this leads to a recession, and the economy returns to its natural rate of growth later in the term with lower inflation.

Political Cycles in OECD Economics
Alberto Alesina and Nouriel Roubini

Discussion Paper No. 470, October 1990 (IM)