inflation and elections theory and evidence for six oecd economies i introduction political business cycle pbc models feature the idea that governments stimulate demand prior to elections in order to improve election prospects while the first generation of pbc models developed by nordhaus 1975 and macrae 1977 assume that voters are naive and retrospective rogoff and sibert 1988 and rogoff 1990 have developed a rational pbc rpbc model where voters are rational and forward looking most empirical studies of political business cycles examine whether unemployment falls the growth rate increases or fiscal and monetary policies become more expansive prior to elections 1 to my knowledge only alesina and roubini 1992 and alesina cohen and roubini 1992 have studied election cycles on inflation based on a large number of elections in 18 oecd countries the authors find evidence of a post election surge in the inflation rate lasting for 3 5 quarters this paper examines whether the existence of election cycles on inflation can be interpreted as supportive evidence of the rpbc theory by focusing on the theory s implications for the relation between post election inflation and the government s re election chances prior to the election in the theoretical part of the paper it is shown that the rpbc theory does not produce unambiguous predictions the functional form of the relation depends on the government s preferences and the election date if electoral terms are fixed or the election takes place close to the mandatory election date average post election inflation will be higher the closer is the election race provided the government always cares about the social costs of election cycles in the empirical part of the paper i generate estimates of the incumbent s election win probability for a sample of 50 elections in six oecd countries three alternative probability series are generated the probability estimates are interacted with dummies turned on after each election and included as regressors in panel data regressions on inflation the three probability series produce the same conclusion the relation between post election inflation and the incumbent s election win probability is hump shaped if the election race is close the inflation rate increases by 0 014 0 018 during the first year after an election i find no indication of an upward jump in inflation after elections when the incumbent s win probability is close to zero or one as noted in the theoretical part of the paper these results are consistent with the rpbc theory the paper is organized as follows the theoretical model is developed in section ii section iii presents the data sample election win probabilities are computed in section iv section v presents the panel data regressions section vi concludes ii theoretical model the theoretical framework is the signalling game developed by persson and tabellini 1990 extended to accommodate the fact that governments always face some uncertainty about the election outcome i first examine a two period game with fixed electoral terms where the election takes place at the end of period one i then consider a three period game where the incumbent chooses whether to call an election in the first or in the second period the output level and the inflation rate in each period t are denoted x sub t and pi sub t respectively pi sub t is determined by the policymaker output is given by the following supply function 1 mathematical expression omitted where mathematical expression omitted are inflation expectations and mu sub t is the policymaker s competence mu sub t is private information for the policymaker and follows a ma 1 process mu sub t eta sub t eta sub t 1 mathematical expression omitted theta with probability 0 5 eta sub t theta with probability 0

global demographic trends and social security reform how sustainable are the current social security systems in the developed economies given the projected demographic trends the most recent literature has answered this question through dynamic general equilibrium models in a closed economy framework this paper provides a new quantitative benchmark of analysis for this question represented by a two region model south and north of the world economy where capital flows across regions the timing and the extent of the demographic transition and the associated economic forces shaping capital accumulation and equilibrium factor prices are very different in the two regions thus the projected paths of interest rate and wage rate in the north diverge substantially between closed and open economy we perform a wide range of policy experiments under both scenarios our main conclusion is that if one is interested in quantifying the path of the fiscal variables e g the value of the payroll tax needed to keep the social security system viable or to finance a transition towards a fully funded system then these two benchmarks yield similar results however if the focus is on quantifying the path of factor prices aggregate variables and ultimately welfare then the two approaches can diverge significantly

macroeconomic policy in a two party system as a repeated game this paper considers the interaction of two parties with different objectives concerning inflation and unemployment and rational and forward looking wage setters if discretionary policies are followed an economic cycle related to the political cycle results in equilibrium this cycle is significantly different from the traditional political business cycle reputational mechanisms due to the repeated interaction of the two parties and the public or commitments to a common policy rule can improve upon the discretionary outcome by reducing or eliminating the magnitude of the economic fluctuations

electoral and partisan cycles between us economic performance and presidential popularity a comment on stephen e haynes in this paper we discuss a recent paper by stephen e haynes in which he relates electoral cycles in political support to electoral cycles in economic variables haynes finds that the cycle in support for republican presidents is explained by the cycle in economic variables whereas the cycle in support for democratic presidents is not in our opinion this shortcoming is due to his specification of the popularity function haynes estimates a popularity function which incorporates the notion that voters reward the incumbent for favourable outcomes score hypothesis our popularity function combines the score hypothesis and the notion that voters cast their ballots for the party that best fits the current economic situation issue hypothesis we show that the electoral cycle in popularity of both republican and democratic presidents is explained very well by the cycle in economic variables

the determinants of vote intentions in portugal this paper offers new insights on theinteractions between economics and politicsin portugal we use two unexplored datasets consisting of monthly polls on voteintentions for the main political partiesin portugal and responses to a consumersurvey containing a battery of questions oneconomic evaluations the analysis coversthe interval from 1986 to 2001 we findthat 1 right wing governments arepenalized for higher inflation while theleft wing ones are not 2 left winggovernments are more penalized forincreases in the unemployment rate 3 voters base their evaluations ofincumbents performances on perceptions ofpast and current economic conditions rather than on expected future economicoutcomes

unemployment and the democratic electoral advantage this article calls into question the conventional wisdom that incumbent parties are rewarded when unemployment is low and punished when it is high using county level data on unemployment and election returns for 175 midterm gubernatorial elections and 4 presidential elections from 1994 to 2010 the analysis finds that unemployment and the democratic vote for president and governor move together other things being equal higher unemployment increases the vote shares of democratic candidates the effect is greatest when republicans are the incumbent party but democrats benefit from unemployment even when they are in control the explanation for these findings is that unemployment is a partisan issue for voters not a valence issue and that the democratic party owns unemployment when unemployment is high or rising democratic candidates can successfully convince voters that they are the party best able to solve the problem

two round elections one round determinants evidence from the french municipal elections using a new database of french municipalities that covers 821 towns and two elections 2001 and 2008 we examine how the budget structure degree of electoral competition and the economic context affect the share of votes for the incumbent we take into account the institutional details of the two round structure of the electoral process created by french electoral rules dual ballot under plurality rules we show that in the first round of the electoral process spending on equipment including infrastructures can influence the voter and that electoral competition has a strong impact on the incumbent s score in the second round the incumbent s vote is affected more by national considerations and local budget variables have no effect we show that the dynamics between the first and the second rounds are intense the results suggest that the determinants of each round s outcome in a two round electoral process are different

how well does the u s social insurance system provide social insurance we analyze the insurance provided by the u s social security and income tax system within a model in which agents receive idiosyncratic wage rate shocks that are privately observed we consider two reforms a piecemeal reform that optimally chooses the social security benefit function and a radical reform that eliminates the entire social insurance system and replaces it with an optimal tax on lifetime earnings the radical reform outperforms the piecemeal reform and achieves nearly all of the maximum possible welfare gain when wages differ permanently over the lifetime when wage shocks match properties in u s data the piecemeal reform outperforms the radical reform

the effect of patient cost sharing on utilization health and risk protection abstract this paper exploits a sharp reduction in patient cost sharing at age 70 in japan using a regression discontinuity design to examine its effect on utilization health and financial risk arising from out of pocket expenditures due to the national policy cost sharing is 60 80 percent lower at age 70 than at age 69 i find that both outpatient and inpatient care are price sensitive among the elderly while i find little impact on mortality and other health outcomes the results show that reduced cost sharing is associated with lower out of pocket expenditures especially at the right tail of the distribution jel g22 i11 i12 i13 i18 j14

econometric estimations of popularity functions a case study for austria in this paper we investigate the effects of changes in economic conditions on the popularity of political parties in austria after a brief description of the austrian political system we estimate single equations and simultaneous systems of popularity functions for different parties based on traditional theoretical foundations results show that some effects of economic variables on popularity exist although they are different between different policy regimes traditional popularity functions nevertheless outperform models based on the assumption of voters rational expectations which claim that only unexpected changes in economic conditions affect political popularity

u s tax policy and health insurance demand can a regressive policy improve welfare abstract the u s tax policy on health insurance is regressive because it subsidizes only those offered group insurance through their employers who also tend to have a relatively high income moreover the subsidy takes the form of deductions from the progressive income tax system giving high income earners a larger subsidy to understand the effect of the policy we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance a complete removal of the subsidy may lead to a partial collapse of the group insurance market reduce the insurance coverage and deteriorate welfare there is however room for improving the coverage and welfare by extending a refundable credit to the individual insurance market

the cyclical and secular behaviour of the labour input comparing efficiency units and hours worked summary a monthly labour input series designed to correct for the fact that all hours worked are not of the same quality is constructed and its properties compared with unadjusted hours worked this efficiency units series is constructed from bls data on hours worked and earnings by age and sex the cyclical fluctuations displayed by the efficiency units series are smaller on average than those displayed by hours worked although the difference is not large however the secular behaviour of the series is quite different hours worked per capita displays a significant positive trend while efficiency units per capita does not

politics and monetary policy abstract how and why do politicians preferences about monetary policy differ from the interest rates set by independent central banks looking at the european central bank ecb this paper shows that politicians on average favor significantly lower interest rates three factors explain the different preferences first politicians put relatively less weight on inflation and more on output in their preferred monetary policy reaction function second their preferences are affected by political economy motives third different preferences are also and largely due to different constituencies as politicians primarily focus on national economic objectives rather than the euro area as a whole

estimation and empirical properties of a firm year measure of accounting conservatism we estimate a firm year measure of accounting conservatism examine its empirical properties as a metric and illustrate applications by testing new hypotheses that shed further light on the nature and effects of conservatism the results are consistent with the measure c score capturing variation in conservatism and also predicting asymmetric earnings timeliness at horizons of up to 3 years ahead cross sectional hypothesis tests suggest firms with longer investment cycles higher idiosyncratic uncertainty and higher information asymmetry have higher accounting conservatism event studies suggest increased conservatism is a response to increases in information asymmetry and idiosyncratic uncertainty

popularity functions based on the partisan theory this paper presents popularity function estimates for u s presidents which are based on a model in which voters evaluations reflect an understanding of partisan reputations for differing policies

political incentives to suppress negative information evidence from chinese listed firms this paper tests the proposition that politicians and their affiliated firms i e firms operating in their province temporarily suppress negative information in response to political incentives we examine the stock price behavior of chinese listed firms around two visible political events meetings of the national congress of the chinese communist party and promotions of high level provincial politicians that are expected to asymmetrically increase the costs of releasing bad news the costs create an incentive for local politicians and their affiliated firms to temporarily restrict the flow of negative information about the companies the result will be fewer stock price crashes for the affiliated firms during these event windows followed by an increase in crashes after the event consistent with these predictions we find that the affiliated firms experience a reduction an increase in negative stock return skewness before after the event these effects are strongest in the three month period directly preceding the event among firms that are more politically connected and when the province is dominated by faction politics and cronyism additional tests document a significant reduction in published newspaper articles about affected firms in advance of these political events suggestive of a link between our observed stock price behavior and temporary shifts in the listed firms information environment

achieving fiscal balance in japan japan is aging and has the highest government debt to output ratio among advanced economies in this article we build a micro data based large scale overlapping generations model for japan in which individuals differ in age gender employment type income and asset holdings and incorporate the japanese pension rules using existing pension law current fiscal policy and medium variants of demographic projections we produce future paths for government expenditures and tax revenues with implications for government debt and the public pension fund additional pension reform a higher consumption tax and higher female labor force participation help achieve fiscal stability

health insurance reform the impact of a medicare buy in abstract the steady state general equilibrium and welfare consequences of a medicare buy in program optional for those aged 55 64 is evaluated in a calibrated life cycle economy with incomplete markets incomplete markets and adverse selection create a potential welfare improving role for health insurance reform we find that adverse selection eliminates any market for a medicare buy in if it is offered as an unsubsidized option to individual private health insurance the subsidy needed to bring the number of uninsured to less than 5 percent of the target population could be financed by an increase in the labor income tax rate of just 0 03 0 18 percent depending on how the program is implemented

opaque financial reports r2 and crash risk abstract we investigate the relation between the transparency of financial statements and the distribution of stock returns using earnings management as a measure of opacity we find that opacity is associated with higher r2s indicating less revelation of firm specific information moreover opaque firms are more prone to stock price crashes consistent with the prediction of the jin and myers 2006 r2 around the world new theory and new tests journal of financial economics 79 257 292 model however these relations seem to have dissipated since the passage of the sarbanes oxley act suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment

property rights protection corporate transparency and growth in countries with secure property rights corporate transparency improves investment efficiency and increases growth by alleviating information asymmetry however in countries with insecure property rights greater transparency can increase the risk of government expropriation therefore some firms that would benefit most from transparency cannot take full advantage of it as they set sub optimal transparency levels using data from 59 industries in 69 countries we find that in countries with weak property rights protection industries that would benefit the most from transparency exhibit worse investment efficiency and grow more slowly than industries that can efficiently operate at minimal levels of transparency

presidential popularity and the economy abstract this study tests the hypothesis that the sensitivity of the president s popularity to economic events differs across distinct demographic groups assuming that presidental popularity is negatively related to both the unemployment rate and the inflation rate the electorate is disaggregated according to sex age race education income and political affiliation and separate regressions are estimated for the individual subgroups using quarterly data covering 1976 through 1988 statistically significant differences in the marginal effects of unemployment and inflation on presidential approval are discovered for the various subgroupings

national elections and tail risk international evidence abstract we investigate stock tail risk around national elections worldwide over the period of 1982 2012 we find that firm stock is less likely to crash during the election years and is more likely to crash during the post election period this inter temporal pattern is consistent with the suppression of negative information when there is heightened political uncertainty around elections and with the subsequent release of adverse news when the uncertainty is reduced further analysis shows that the impact of political uncertainty on tail risk is stronger in countries with poorer investor protection fewer electoral checks and balances more uncertain election outcomes and pro business incumbent governments in industries which are more politically sensitive and in firms with larger information asymmetry

the effects of health insurance and self insurance on retirement behavior this paper provides an empirical analysis of the effects of employer provided health insurance medicare and social security on retirement behavior using data from the health and retirement study we estimate a dynamic programming model of retirement that accounts for both saving and uncertain medical expenses our results suggest that medicare is important for understanding retirement behavior and that uncertainty and saving are both important for understanding the labor supply responses to medicare half the value placed by a typical worker on his employer provided health insurance is the value of reduced medical expense risk raising the medicare eligibility age from 65 to 67 leads individuals to work an additional 0 074 years over ages 60 69 in comparison eliminating 2 years worth of social security benefits increases years of work by 0 076 years

the effects of health wealth and wages on labour supply and retirement behaviour this paper estimates a life cycle model of labour supply retirement and savings behaviour in which future health status and wages are uncertain individuals face a fixed cost of work and cannot borrow against future labour pension or social security income the method of simulated moments is used to match the life cycle profiles of labour force participation hours worked and assets that are estimated from the data to those that are generated by the model the model establishes that the tax structure of the social security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65 removing the tax wedge embedded in the social security earnings test for individuals aged 65 and older would delay job exit by almost one year by contrast social security benefit levels health and borrowing constraints are less important determinants of job exit at older ages for example reducing social security benefits by 20 would cause workers to delay exit from the labour force by only three months

political risk and dividend policy evidence from international political crises we examine the impact of political risk on firms payout policy using a large international sample across 35 countries over the period from 1990 to 2008 we find that global political crises raise the market perceived uncertainty and cost of external financing using crisis events as a proxy for political risk we document that past dividend payers are more likely to terminate dividends and that non payers are less likely to initiate dividends during periods of high political risk these findings suggest a precautionary incentive of managers in response to political shocks further analysis shows that the effect of political risk on payout policy is stronger for multinational corporations but can be attenuated by country specific institutional settings such as more stable political systems and stronger investor legal protection

fiscal cost of demographic transition in japan abstract this paper quantifies the fiscal cost of demographic transition that japan is projected to experience over the next several decades in a life cycle model with endogenous saving consumption and labor supply in both intensive and extensive margins retirement waves of baby boom generations combined with a rise in longevity and low fertility rates raise the old age dependency ratio to 85 by 2050 the highest among major developed countries and generate a significant budget imbalance as the government faces rising costs of public pension and health and long term care insurance preserving the current level of the transfers will require a major increase in taxation using consumption taxes to balance the government budget the tax rate reaches the maximal value of 48 in late 2070s a pension reform to reduce benefits by 20 results in a peak tax rate of 37 which can be reduced further to 28 if the retirement age is also gradually raised by 5 years

in search of the motives behind us fiscal macroeconomic policy in this paper optimal control tehniques are applieed to estimate the motives behind us fiscal macroeconomic policy starting from a range of possible objesctives and given the perception of policy makers about the environment in which they operate the priorities of policy makers are estimated on the basis of their past actions our statistical approach allows for testing the empirical relevance of alternative hypotheses with respect to the objectives of governments demoeratic and republican administrations are found to aim at different targets some support is also found to political business cycle theories the views expressed here are not necessarily those of the ductch central bank

studying the role of political competition in the evolution of government size over long horizons here we argue for the use of cointegration and error correction analysis to combine economic factors that are nonstationary with political factors that are stationary into an empirical model of the evolution of public policy over long periods the approach is applied to disentangle the contributions of economics and politics to the evolution of public expenditure by the government of canada over 130 years political competition emerges as the primary political factor affecting government size

politico economic consequences of rising wage inequality abstract this paper uses a dynamic political economy model to evaluate whether the observed rise in wage inequality and decrease in median to mean wages can explain some portion of the relative increase in transfers to low earnings quintiles and relative increase in effective tax rates for high earnings quintiles in the u s over the past several decades specifically we assume that households have uninsurable idiosyncratic labor efficiency shocks and consider policy choices by a median voter which are required to be consistent with a sequential equilibrium we choose the transition matrix to match observed mobility in wages between 1978 and 1979 in the panel study of income dynamics psid data set and then evaluate the response of social insurance policies to a new transition matrix that matches the observed mobility in wages between 1995 and 1996 and is consistent with the rise in wage inequality and the decrease in median to mean wages between 1979 and 1996 we deal with the problem that policy outcomes affect the evolution of the wealth distribution and hence prices by approximating the distribution by a small set of moments we contrast these numbers with those from a sequential utilitarian mechanism as well as mechanisms with commitment

cost of business cycles with indivisibilities and liquidity constraints it is almost universally agreed that individuals face incomplete insurance markets and cannot perfectly insure against the idiosyncratic risk in this paper simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles two versions of incomplete insurance markets are considered and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

disclosures and asset returns public information in financial markets often arrives through the disclosures of interested parties who have a material interest in the reactions of the market to the new information when the strategic interaction between the sender and the receiver is formalized as a disclosure game with verifiable reports equilibrium prices can be given a simple characterization in terms of the concatenation of binomial pricing trees there are a number of empirical implications the theory predicts that the return variance following a poor disclosed outcome is higher than it would have been if the disclosed outcome were good also when investors are risk averse this leads to negative serial correlation of asset returns other points of contact with the empirical literature are discussed

elections political competition and bank failure abstract we exploit exogenous variation in the scheduling of gubernatorial elections to study the timing of bank failure in the us using hazard analysis we show that bank failure is about 45 less likely in the year leading up to an election political control i e lack of competition can explain all of this average election year fall in the hazard rate in particular we show that the reduction in hazard rate doubles in magnitude for banks operating in states where the governor has simultaneous control of the upper and lower houses of the state legislature i e complete control heading into an election

market liquidity hedging and crashes in the absence of significant news hedging strategies were blamed for the stock market crash of october 1987 but traditional models cannot explain how a relatively small amount of selling could cause so large a price drop the authors develop a rational expectations model in which prices play an important role in shaping expectations markets are much less liquid in their model than in traditional models discontinuities or crashes can occur even with relatively little hedging the model is consistent with theories as disparate as keynes beauty contest insights and thom s catastrophe analysis and suggests means to reduce volatility copyright 1990 by american economic association

corporate governance and conditional skewness in the world s stock markets we investigate why stock returns in emerging markets tend to be more positively skewed than those in developed markets we argue that differences in the quality of corporate governance matter to return skewness using return data from more than fourteen thousand individual stocks in 38 countries we find that positive skewness is most profound in stocks from markets that have poor corporate governance our results are robust to a variety of model specifications different measures of return asymmetries and alternative measures of corporate governance finally analogous results are also obtained from aggregate stock market returns

consumption taxes and economic efficiency with idiosyncratic wage shocks fundamental tax reform is examined in an overlapping generations model in which heterogeneous agents face idiosyncratic wage shocks and longevity uncertainty a progressive income tax is replaced with a flat consumption tax if idiosyncratic wage shocks are insurable i e no risk this reform improves interim efficiency a result consistent with the previous literature but if more realistically wage shocks are uninsurable this reform reduces efficiency even though national wealth and output increase over the entire transition path this efficiency loss in large part stems from reduced intragenerational risk sharing that was previously provided by the progressive tax system

employment insecurity incumbent partisanship and voting behavior in comparative perspective we argue that occupational unemployment rates by informing perceptions of economic insecurity serve as a salient and powerful heuristic for aggregate economic performance consequently high and

population aging health care and fiscal policy reform the challenges for japan we construct a transition analysis based on a general equilibrium life cycle model to investigate the effects of aging and we evaluate various policy alternatives designed to lessen the negative influence of aging in particular we analyze reforms of insurance benefits and tax financing tools that were recently the focus of a great amount of attention and debate in japan because of the tense financial situation there we show that although the potential reforms improve the welfare of future generations the political implementation of such reforms is difficult because of the large welfare costs for the current population our analysis suggests that a gradual reform with an intergenerational redistribution will be more politically implementable than an immediate reform