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Do Expected Downturns Kill Political Budget Cycles?

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Abstract

The political budget cycle (PBC) literature argues that governments expand de cits in election years. However, what happens when an economic downturn is expected? Will the government allow the de cit to expand even further, or will it resort to spending cuts and tax increases? When voters expect less than full automatic stabilization, our model shows that opportunistic government behavior leads to smaller de cits, thereby responding procyclically to expected downturns. Panel data evidence for 74 democracies covering the period 2000-2016 robustly supports the theoretical procyclicality prediction. Moreover, expected downturns remain signi cant when other context-conditional PBC e ects are included in the empirical analysis.

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  • Jan-Egbert Sturm & Frank Bohn, 2020. "Do Expected Downturns Kill Political Budget Cycles?," KOF Working papers 20-481, KOF Swiss Economic Institute, ETH Zurich.
    • Handle: RePEc:kof:wpskof:20-481
    DOI: 10.3929/ethz-b-000421602
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    3. Lamar Crombach & Frank Bohn, 2024. "Uninformed voters with (im)precise expectations: Explaining political budget cycle puzzles," Economics and Politics, Wiley Blackwell, vol. 36(1), pages 275-311, March.
    4. Daniele, Gianmarco & Romarri, Alessio & Vertier, Paul, 2021. "Dynasties and policymaking," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 89-110.
    5. García, Israel & Hayo, Bernd, 2021. "Political budget cycles revisited: Testing the signalling process," European Journal of Political Economy, Elsevier, vol. 69(C).
    6. Stephan Schneider & Sven Kunze, 2021. "Disastrous Discretion: Ambiguous Decision Situations Foster Political Favoritism," KOF Working papers 21-491, KOF Swiss Economic Institute, ETH Zurich.
    7. Crombach, Lamar & Bohn, Frank & Sturm, Jan-Egbert, 2024. "The “Benefits” of being small: Loose fiscal policy in the European Monetary Union," Journal of Public Economics, Elsevier, vol. 234(C).
    8. Wang, Xue & Bohn, Frank & Veiga, Francisco José, 2023. "When do more selfish politicians manipulate less, not more?," European Journal of Political Economy, Elsevier, vol. 77(C).
    9. Aldama, Pierre & Creel, Jérôme, 2022. "Real-time fiscal policy responses in the OECD from 1997 to 2018: Procyclical but sustainable?," European Journal of Political Economy, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    political budget cycles; elections; growth expectations; economic downturns; precautionary voters; automatic stabilization; fiscal deficits;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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