political cycles in oecd economies this paper studies whether the dynamic behaviour of gnp growth unemployment and inflation is systematically affected by the timing of elections and of changes of governments the sample include the last three decades in 18 oecd economies we explicitly test the implication of several models of political cycles both of the opportunistic and of the partisan type also we confront the implication of recent rational models with more traditional approaches our results can be summarized as follows a the political business cycle hypothesis as formulated in nordhaus 1975 on output and unemployment is generally rejected by the data b inflation tends to increase immediately after elections perhaps as a result of pre electoral expansionary monetary and fiscal policies c we find evidence of temporary partisan differences in output and unemployment and of long run partisan differences in the inflation rate as implied by the rational partisan theory by alesina 1987 d we find virtually no evidence of permanent partisan differences in output growth and unemployment

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

credible spatial preemption it is often argued that incumbent firms may deter entry by preemptive investment in new goods we show that these conclusions are reversed when multiproduct incumbentfirms may exit in response to entry once entrants are in an industry an incumbent will often want to withdraw some goods to prevent competition with the entrant from reducing profits on other goods such a reaction makes entry more attractive to a potential entrant the equilibrium industry structure is less likely to be monopolistic as the goods are better substitutes as exit costs are low and as the competition between producers of the same good is more intense

tax aversion in labor supply abstract in a real effort laboratory experiment labor supply decreases more with the introduction of a tax than with a financially equivalent drop in wages this tax aversion is large in magnitude when we decompose the productivity decrease that arises from taxation we estimate that 40 is due to the lower net wage and the remaining 60 to tax aversion this tax aversion affects labor supply more on the extensive margin working less than on the intensive margin being less productive while working the aversion is equally strong whether tax revenue goes to the u s government or back to the experimenter a laboratory tax we discuss the implications of our results for the relationship between labor supply and taxation

presidents and the u s economy an econometric exploration the us economy has performed better when the president of the united states is a democrat rather than a republican almost regardless of how one measures performance for many measures including real gdp growth our focus the performance gap is large and significant this paper asks why the answer is not found in technical time series matters nor in systematically more expansionary monetary or fiscal policy under democrats rather it appears that the democratic edge stems mainly from more benign oil shocks superior total factor productivity tfp performance a more favorable international environment and perhaps more optimistic consumer expectations about the near term future jel d72 e23 e32 e65 n12 n42 an extensive and well known literature of scholarly research documents and explores the fact that macroeconomic performance is a strong predictor of us presidential election outcomes scores of papers find that better performance boosts the vote of the incumbent s party 1 in stark contrast economists have paid scant attention to predictive power running in the opposite direction from election outcomes to subsequent macroeconomic performance the answer while hardly a secret is not nearly as widely known as it should be 2 the us economy performs much better when a democrat is president than when a republican is

political business cycles 40 years after nordhaus the aim of this article is to survey the huge literature that has emerged in the last four decades following nordhaus s rev econ stud 42 2 169 190 1975 publication on political business cycles pbcs i first propose some developments in history of thought to examine the context in which this ground breaking contribution saw the light of the day i also present a simplified version of nordhaus s model to highlight his key results i detail some early critiques of this model and the fields of investigations to which they gave birth i then focus on the institutional context and examine its influence on pbcs the actual research agenda finally i derive some paths for future research

state responses to fiscal crises the effects of budgetary institutions and politics this paper explores the dynamics of state taxes and spending during the late 1980s when regional economic downturns and increased expenditure demands led to substantial state budget deficits more restrictive state fiscal institutions such as no deficit carryover rules and tax and expenditure limitations are correlated with more rapid fiscal adjustment to unexpected deficits political factors are also important when a single party controls the state house and the governorship deficit adjustment is much faster than when party control is divided in gubernatorial election years tax increases and spending cuts are both significantly smaller than at other times

money politics and the post war business cycle abstract the political economy literature has enshrined as stylized fact the view that lower inflation and temporarily lower growth follow the election of republican presidents and has emphasized political manipulation of monetary policy as an explanation support for the monetary explanation comes in econometric work that largely ignores identification issues that dominate the literature on measuring the effects of monetary policy we generalize a standard vector autoregression framework to accommodate discrete political party variables we find almost no support for the view that political effects on the macroeconomy operate through monetary policy and only weak evidence that political effects are significant at all

electoral uncertainty fiscal policy and macroeconomic fluctuations abstract in this paper we study the link between elections fiscal policy and aggregate fluctuations the setup is a stylized dynamic stochastic general equilibrium model incorporating both technology and political re election shocks the latter are incorporated via a two party model with elections the main theoretical prediction is that forward looking incumbents with uncertain prospects of re election find it optimal to follow relatively shortsighted fiscal policies and that this hurts capital accumulation our econometric estimation using u s data finds a statistically significant link between electoral uncertainty and policy instruments and in turn macroeconomic outcomes

union wage setting and unemployment in the netherlands 1965 1987 this paper presents an empirical model of union wage setting and employment the stackelberg equilibrium unemployment rate is shown to be a function of taxes the replacement ratio the gap between consumer and producer prices productivity effects and the rate of long term unemployment the model is estimated with aggregate data from the private sector in the netherlands 1965 1987 the results suggest that the equilibrium unemployment rate is pushed upwards by taxes the replacement ratio and by the gap between consumer and producer prices and is reduced by productivity effects insider outsider effects appear insignificant

does a shift in the tax burden create employment according to dalton s law it does not matter which side of the market is taxed this holds for a model of the labour market as well nevertheless it is often maintained that shifting the wedge from employers to employees has favourable effects on employment that is a shift from employers to employees taxes decreases wages and hence unemployment this apparent paradox is discussed by analysing the impact of taxes in a wage bargaining model it is shown that dalton s law does not necessarily hold in those models the findings are illustrated by empirical results concerning tax shifting by employers and employees for the netherlands it is found that no employers taxes are shifted backwards whereas about 44 of employees taxes are shifted forwards these values imply a positive effect on employment of a reduction of the wedge in favour of employers

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 politics of speculative attacks in industrial democracies recent models of speculative currency crises contend that market expectations of policy behavior can trigger a speculative attack we argue that political processes and partisan objectives inform expectations about the government s commitment to the exchange rate first market actors anticipate periods when the partisan identity of a government may change through an election or a cabinet collapse second party labels provide information to currency traders about the policy objectives of a potential government consequently we contend that the probability of a speculative attack will be higher when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy a discrete timesurvival model is used to estimate the probability that a cabinet will dissolve in any given month for sixteen parliamentary democracies from 1970 to 1995 the predicted values are then used as a proxy for market expectations in a model of speculative currency crises

fed behavior in periods of price and wage controls there is a literature which addresses the bureaucratic behavior and incentives of the federal reserve system some of the papers along these lines include acheson and chant 1973 kane 1980 levy 1981 toma 1981 friedman 1982 shughart and tollison 1983 and allen 1986 this paper brings to bear some additional evidence on the behavior and the incentives of the fed in particular we examine the behavior of the fed during periods of price and wage controls the public interest approach to fed behavior suggests that the fed should pursue a monetary policy that is consistent with price and wage controls in order to control inflationary forces the private interest approach suggests that price and wage controls make seigniorage operations more profitable for the fed and make it more difficult for fed overseers to monitor fed performance in both cases leading the fed to pursue monetary expansion in its own self interest during a period of price and wage controls the setting of price and wage controls therefore provides a test of public versus private interest hypotheses about fed behavior the paper proceeds as follows section 2 develops the competing explanations of federal reserve behavior section 3 presents the estimates of a structural money supply reaction function and an arima transfer function model of fed behavior in each case controlling for ceteris paribus conditions and periods of wage and price controls the results of both models indicate a falsification of the public interest explanation of fed policy section 4 offers some concluding remarks

electoral cycles and budgetary growth in veterans benefit programs while many studies have generated negative findings regarding the general existence of electoral cycles in economic phenomena we have found an apparently robust electoral cycle in veterans benefits this pattern was found between 1961 and 1978 but has disappeared since then we use this case to investigate the possibility that electoral cycles might contribute to the growth of government spending using two different methods of inference we find no strong basis to conclude that such cycles cause increasing public sector growth

voters information heterogeneity and the dynamics of aggregate economic expectations theory it is argued here that previous studies analyzing the formation of voters economic expectations overlook important subtleties found in a differentiated heterogeneous electorate since different segments of the electorate possess varying information capabilities it is asserted that they will form their prospective economic evaluations differently from one another hypotheses the impact of expectational electoral cycles news coverage of the economy reported by voters retrospective economic evaluations and personal financial expectations are hypothesized to have a differential impact on their economic expectations based on varying levels of information education among subsets of the electorate methods time series multiple regression analysis is conducted for the monthly period between january 1978 and december 1990 the empirical analysis involves testing for the properties of the statistical time series i e integration and cointegration as well as specification of an error correction mechanism ecm that captures long run statistical relationships in appropriate circumstances results these findings uncover electoral heterogeneity based on information education differences with respect to voters prospective economic evaluations specifically the information capabilities of voters is inversely related to their reliance on past retrospective sources of information when forming both egocentric and sociotropic economic expectations the main implication of this research is that the assumption of electoral homogeneity contained in previous longitudinal analyses of aggregate economic opinion formation provides misleading results that either overlook intra electoral variations introduce aggregation bias or possibly both

the applicability of the traditional theory of economic policy abstract the traditional theory of economic policy requires targets instruments an empirical economic model and a social welfare or criterion function to be specified in order to derive the optimal economic policy empirical studies of reaction functions suggest that economic policy is carried out in some systematic manner subject to interference from political factors this survey addresses the problems of specifying estimating and applying an economic model when economic policy is following a path specified by a reaction function attention is paid to rational expectations the lucas critique and the policy neutrality proposition lack of knowledge of the policy maker s objective function poses the most serious difficulty when applying the theory of economic policy various methods of determining this function are reviewed and the possibility that policy makers might be satisficing is discussed the role played by political factors is considered in the light of the public choice literature

the politics of finance how capital sways african central banks abstractwhile there is a large literature on the politics of central banking its insights are difficult to translate to sub saharan africa this article addresses gaps in this literature by considering how the interests of those who control financial resources sway african central banks case studies of kenya nigeria and uganda demonstrate that variation in the sources of capital on which countries rely to finance investment helps to account for the pattern of variation in central bank policy stances the analysis further develops and probes arguments about power derived from the control of capital in the context of developing countries

credible retaliatory entry and strategic toe holds the anticipated profits from entry by an established firm into a new market will depend on how incumbents in that market are expected to respond one possibility suggested by cases and the literature is that an incumbent may respond with retaliatory entry into the first entrant s home market the model presented here describes conditions under which this can be a credible threat that deters the first entry when the conditions are such that it is not credible the paper shows how firms can provide credibility through the establishment of toe hold investments in other markets

political business cycles and macroeconomic credibility a survey there is clear evidence that government popularity and election performance is affected in part by economic performance suggesting that governments may manipulate the economy to political advantage simple models incorporating adaptive expectations which allowed the government to exploit this relationship were developed in the 1970s but fell out of fashion with the advent of new classical economics however modern theories of the political business cycle which are closely related to the macroeconomic policy game literature assume rational expectations and lead to forms of political business cycle driven by the existence of uncertainty of one type or another the international evidence suggests that some aspects of the theories apply although definitive conclusions are as we might expect hard to come by

divided government fiscal institutions and budget deficits evidence from the states does partisan control of american state government have systematic effects on state spending and taxing levels does divided control affect the government s ability to make hard decisions do institutional rules like legal deficit carryover restrictions matter using a formal model of fiscal policy to guide empirical analysis of data covering the american states from 1968 to 1987 we conclude that 1 aggregate state budget totals are driven by different factors under democrats and republicans the net result being that democrats target spending and taxes to higher shares of state level personal income 2 divided government is less able to react to revenue shocks that lead to budget deficits particularly where different parties control each chamber of the legislature and 3 unified party governments with restricted ability to carry deficits into the next fiscal year outside the south have sharper reactions to negative revenue shocks than those without restrictions

searching for political business cycles in germany one reslt of the revitalised literature on political business cycles is that there are signs in german data that elections and ideology have an impact however using monthly data for the period 1950 1989 and standard methods of time series analysis we reject both the nordhaus hypothesis of opportunistic cycles and the partisan approaches by hibbs ans alesina we show that some results are sensitive to the assumption of stationarity there are signs of policy cycles in m1 it is hard though to bring this in line with the rogoff hypothesis of rational opportunistic cycles because of the german institutional setting

financial system development in transition economies this paper provides an overview of the major issues with respect to financial system development in transition economies which were discussed at a conference in groningen the netherlands december 1997 after a brief remark on the role of financial system design during economic transition the paper focuses on the role of stock markets in the process of financial intermediation with emphasis on the role of regulations in these markets the role of deposit insurance to improve bank system stability and the importance of an independent central bank measurement issues relating to central bank independence and its impact on inflation and growth 2000 elsevier science b v all rights reserved

the non equivalence of labour market taxes a real effort experiment under full rationality a labour market tax levied on employers and a corresponding income tax levied on employees are equivalent with boundedly rational agents this equivalence is no longer obvious in a real effort experiment we study the effects of these taxes on preferences concerning the size of the public sector subjective well being labour supply and on the job performance our findings suggest that employer side taxes induce preferences for a larger public sector subjective well being is higher under employer side taxes while labour supply is lower at least at the extensive margin we discuss three mechanisms that may underlie these results

capital as a commitment strategic investment to deter mobility abstract this paper analyzes how an early entrant in a market can exploit its head start by strategic investment the analysis is based on spence s paper investment strategy and growth in a new market bell j econ 10 1979 1 19 we frist study the investment game in the no discounting case which embodies the key features of mobility deterrence we establish the existence of a set of perfect equilibria and suggest that one particular equilibrium is most reasonable this equilibrium also valid with discounting involves the follower firm being forever deterred from investing to its steady state reaction curve in contrast to spence s proposed solution

a model of the political economy of the united states we develop and test a model of joint determination of economic growth and national election results in the united states the formal model which combines developments in the rational choice analysis of the behavior of economic agents and voters leads to a system of equations in which the dependent variables are the growth rate and the vote shares in presidential and congressional elections our estimates support the theoretical claims that growth responds to unanticipated policy shifts and that voters use both on year and midterm elections to balance the two parties on the other hand we find no support for rational retrospective voting we do reconfirm in a fully simultaneous framework the naive retrospective voting literature s finding that the economy has a strong effect on presidential voting we find congressional elections unaffected by the economy except as transmitted by presidential coattails

counterfiscal policies and partisan politics evidence from industrialized countries according to partisan theories of macroeconomic policy left wing parties are more concerned with unemployment while right wing parties tend to weigh the costs of inflation higher an implication of partisan theories is that partisan policy differences should depend on the state of the economy with left wing governments conducting relatively more expansive policies during recessions we test whether left wing governments are more favourably inclined towards countercyclical fiscal policies than their right wing counterparts using a panel data set of 18 oecd countries from 1980 to 1992 the results are supportive of partisan theories the structural deficit is significantly higher under left wing governments when unemployment is high or rising while the ideology of the government party parties has no significant impact on the structural deficit when unemployment is low or falling

hourly wages and working time in the dutch market sector 1962 1995 this article analyses the joint behaviour of hourly wages and standard hours in the netherlands with respect to the development of full time hours to different hypotheses are suggested work sharing or productivity sharing under the work sharing hypothesis high unemployment would lead to reduced hours whereas under productivity sharing increased productivity leads to higher wages or reduced hours the evidence is in favour of the productivity hypothesis there is no direct impact of unemployment on the evolution of hours moreover although reduced hours tend to increase hourly wages in the short run this is not the case in the long run

the electoral dynamics of human development this paper analyses the impact of elections on the dynamics of human development in a panel of 82 countries over the period 1980 2013 the incidence of partisan and political support effects is also taken into account a gmm estimator is employed in the empirical analysis and the results point out to the presence of an electoral cycle in the growth rate of human development majority governments also influence it but no clear evidence is found regarding partisan effects the electoral cycles have proved to be stronger in non oecd countries in countries with less frequent elections with lower levels of income and human development in presidential and non plurality systems and in proportional representation regimes they have also become more intense in this millennium

us presidential elections and implied volatility the role of political uncertainty abstract this paper focuses on the effects of political uncertainty and the political process on implied stock market volatility during us presidential election cycles using monthly iowa electronic markets data over five elections we document that stock market uncertainty as measured by the vix volatility index increases along with positive changes in the probability of success of the eventual winner the association between implied volatility and the election probability of the eventual winner is positive even after controlling for changes in overall election uncertainty these findings indicate that the presidential election process engenders market anxiety as investors form and revise their expectations regarding future macroeconomic policy

the politics of public aid to private industry the role of policy networks firms lobby for subsidies along geographic sector or factor lines and as a result receive subsidies with a local sectoral or factorwide scope this article investigates what determines the line of cleavage and thereby the scope of the subsidy the factor mobility hypothesis according to which an economic prior the degree of factor mobility determines the geometry of lobbying coalitions misses the fact that factor mobility is as much the product of policy and policymaking as it is its determinant this article argues instead that politicians maximize their chances of staying in power through the deliberate use of subsidies to structure the political debate and embed factor owners into stable policy networks individual factor owners in turn join these policy networks to lobby for monopoly rents capable of insuring them against adverse economic competition the model yields two testable hypotheses first right governments favor subsidies to capital whereas left governments favor subsidies to lab

benefits and unemployment in an open economy an equilibrium analysis this paper examines the relation between uemployment compensation and unemployment in the netherlands this relation is studied by menas of a small macroeconomic model for an open economy that assumes equilibrium in the labour market and on the current account the model yields an elasticity of unemployment to benefits of 1 0 which is high compared to microeconomic research and the outcomes of disequilibrium models for the netherlands according to the model a rise in the wedge i e the difference betweenn real labour cost and real net wages leads to an increase in unemployment whilst shifting this wedge from the employers to the employees induces a fall in unemployment

sequential entry industry structure and welfare in this paper we reexamine the relationship between potential competition industry structure and welfare in a market subject to a sequential entry threat where firms can make quantity commitments and have access to a constant returns technology it is shown that provided entry is not blockaded the incumbent s will either prevent entry or allow all the potential entrants in furthermore actual entry may decrease but social welfare never goes down with more potential entrants nevertheless with a finite number of potential entrants policies which lower the cost of entry need not be beneficial in welfare terms

the role of obsolescence and inventory costs in providing commitment this paper modifies the cournot and stackelberg models to allow the firms to sell less than they have produced and to store the unsold portion of their output as inventory even if one of the firms can choose its output before the other if it is costless to carry unsold goods forward then the cournot outcome emerges we show however that costs of carrying the inventory forward endow the firms with a limited degree of commitment to sell what they have produced this partially restores the first mover advantage if the firms choose their outputs simultaneously the cournot outcome emerges and has locally consistent conjectures

political and economic determinants of interest rate behavior are central banks different i introduction do politicians manipulate the instruments of macroeconomic policy to improve their electoral prospects or in response to the preferences of their own party these questions are addressed but not yet resolved by the literature on political business cycles 1 to generate a political business cycle politicians must control the instruments of macroeconomic policy monetary policy plays an important role in the determination of inflation output and employment the objects of concern to politicians and voters yet politicians do not directly control the instruments of monetary policy in industrialized countries instead these instruments are controlled by the central banks which vary widely across countries in their degree of statutory independence we wish to examine empirically whether monetary policy is influenced by the timing of elections or a change in the party in power after controlling for unexpected changes in economic fundamentals our paper assesses therefore one aspect of independence namely whether a central bank makes monetary policy decisions without measurable political influence 2 in this study we attempt to look at what central banks actually do as opposed to what they are legislated to do to distinguish between the form and substance in discussions of central bank independence as in mayer 1976 3 our paper enlarges and improves on cowart 1978 and woolley 1983 both of whom studied the role of political factors in monetary policy for a sample of industrialized countries our methodology is to compare the responsiveness of interest rate changes to economic and political factors in seventeen countries as we discuss below there are differences in opinion about whether an interest rate variable or a monetary aggregate is a better representation of monetary policy actions we compare the results of qualitative measures of differences in central bank design e g rankings of banks in order of independence as determined by legislative criteria with the results of a quantitative comparison of differences in central bank behavior this exercise should help identify the important qualitative features in the reform of existing central banks or in the design of new central banks 4 in our empirical work the relevant relationships are estimated with a recursive vector autoregression technique to control for temporal instability in the economy between 1960 and 1990 and the endogeneity of the variables in question this methodological innovation has important consequences for the understanding of reaction functions and more generally for measuring the impact of macroeconomic shocks on monetary policy we also stress results for separate subsamples of fixed and flexible exchange rates as well as for the full sample our methodology measures the influence of politics on monetary policy relative to the choices and information actually available to the central bank when the monetary policy decision was made our study does not measure the influence of politics on the instruments of fiscal policy as in alesina et al 1991 our study also does not measure the direct influence of fiscal variables on the instruments of monetary policy although there is some evidence on this issue in for example parkin 1986 and burdekin and wohar 1990 burdekin and wohar estimate the relationships between deficits money base growth and inflation for a sample of countries and time period comparable to ours all these studies find some evidence that central banks do accommodate fiscal policy by financing deficits via money growth especially since the end of bretton woods we return to the issue of fiscal policy in considering the interpretation of our results but stress that the effects of fiscal policy are partly captured in our specifications because we measure monetary policy relative to the state of the economy 5 a brief review of the literature which measures statutory central bank independence is given in section ii

the political determinants of fiscal policies in the states of india an empirical investigation abstract using data from the 14 major states of india we investigate whether state governments fiscal policy choices are tempered by political considerations our principal findings are twofold first we show that certain fiscal policies experience electoral cycles state governments raise less commodity tax revenue spend less on the current account and incur larger capital account developmental expenditures in election years than in all other years second we show that coalition state governments raise less own non tax revenues and spend less on the current account than state governments that are more cohesive in composition in sum the dispersion of political power affects government size

the determinants of tenure on the federal reserve board of governors should i stay or should i go this paper examines the quit behaviour of members of the federal reserve board of governors we find that the probability of a member continuing is lower when the member is an economist when the member comes to the board from the private sector and when their policy views differ from the board as a whole in addition we find evidence that the president can exert influence on the fed by the power of appointment and in contrast with what one might expect we find that salaries on the board relative to the private sector do not seem to be an important factor in determining the decision to continue service on the board

deficits and money growth in the united states a comment joines 1985 argues that the federal reserve accommodates war induced deficit spending but not non war induced deficit spending using a first difference form of a reaction function to obtain a stationary time series of the monetary base we find that the federal reserve has accommodated federal government deficit spending in the post world war ii period

the influence of elections on federal reserve behavior a political business cycle is tested in a monetary reaction function positive evidence is a result of the 1930s and 1940s and not post war elections in addition there is no evidence of such a cycle in a rational expectations model

political business cycles democratization and economic reform the case of africa abstract this paper presents cross country evidence that political business cycles are alive and well in the nascent democracies of the developing world africa provides fertile ground for the study of political business cycles this paper uncovers systematic electorally timed interventions in five monetary and four fiscal policy variables in a panel of african countries these findings are consistent with the predictions of rational opportunistic political business cycle theory if africa s increasingly frequent elections are associated with reversals of fiscal and monetary policy reform there is a potential conflict between political and economic reform

the political manipulation of macroeconomic policy conventional wisdom and some research indicate that macroeconomic policies follow cycles corresponding to political as well as economic forces using vector autoregression analysis i test three models of monetary policy determination for the united states 1953 1984 the electoral cycle model that reelection motivations on the part of presidents create a policy cycle the party differences model that policy changes reflect revolving presidential party administrations and the referendum model that changes in presidential approval create in effect a continuing referendum allowing presidents to monitor their success and change macroeconomic policies when necessary analysis shows that monetary policies as measured by the monetary base and short term interest rates respond to the election cycle and presidential approval although the effect on macroeconomic outcomes is ambiguous party differences are found in real income but are not very significant in other variables

political parties and the business cycle in the united states 1948 1984 this paper tests the existence and the extent of a politically induced business cycle in the u s in the post world war ii period the cycle described in this paper is different from the traditional political business cycle of nordhaus it is based on a systematic difference between the monetary policies of the two parties in a model with labor contracts from an explicit optimization problem we derive a system of equations for output and money growth then we successfully test the non linear restriction imposed by the theory on the parameters of the system of equations we cannot reject the hypothesis that money growth has been systematically different under the two types of administration and that this difference contributes to explain output fluctuations

another look at the evidence for rational partisan cycles in presenting evidence in favor of rational partisan cycles where electoral victories by leftist parties are expected to create temporary expansions and electoral victories by rightist parties are expected to create temporary recessions alesina cohen and roubini 1999 rely upon autoregressive time series intervention regressions these regressions however are not consistent with their model in this paper a model is derived which is consistent with the intervention approach in its reduced form the differences between the models are highlighted and new empirical estimates are presented on a panel of seven oecd nations which generally does not support the rational partisan cycle implications

the use of inputs by the federal reserve system an extended model recently it has been argued that bureaucratic incentives play an important role in the formulation of policy and the inflationary bias of the federal reserve system shughart and tollison 1983 hereafter s t 1 in particular s t maintain that the fed can retain profits denominated in amenities but not in dollars as a result of the congressional constraint that excess profits be returned to the treasury this constraint provides bureaucratic incentives for the fed to purchase more amenities than a for profit organization and ex plains s t 1983 291 in part the fed s apparent inflationary bias expansionary monetary policy then enlarges the fed s profit amenities choices and allows it to pursue its goal of bureaucratic enhancement s t assume that the dollar value of these amenities is a monotonic transformation of fed employment using this public choice framework they develop a model in which the monetary base is a function of a number of variables including employment in the federal reserve system sysemp

the unemployment rate consequences of partisan monetary policies economists and political scientists have identified several ways in which political motivations and institutional arrangements can affect macroeconomic policymaking one way is described by the political business cycle model 42 37 in which vote seeking politicians manipulate the path of the economy to secure unsustainably favorable conditions at election times variants of this model have been widely tested with limited success a second channel for political impacts comes through partisan policy changes brought about by electoral turnover the pathbreaking work in this literature includes the contributions of hibbs 30 31 32 33 and beck 11 these works have focused on the empirical issue of how unemployment rates vary under democratic and republican presidents in the u s and have found strong support for the proposition that unemployment rates decline under democratic administrations a third phenomenon has been studied primarily by economists and concerns the credibility problem faced by a central bank selecting money growth rates models of the credibility problem 8 21 describe a setting in which the central bank and the public interact by respectively choosing actual and expected money growth rates in a variant of the prisoners dilemma this interaction can result in excessive inflation

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

partisan monetary policies presidential influence through the power of appointment we investigate the channels through which partisan influence from a presidential administration could affect monetary policy making influence could be a result of direct presidential pressure exerted on members of the federal open market committee fomc or it could be a result of partisan considerations in presidential appointments to the board of governors to investigate these two channels of influence we devise and apply a method for estimating parameters of monetary policy reaction functions that can vary across individual members of the fomc our results suggest that the appointments process is the primary mechanism by which partisan differences in monetary policies arise

preemptive investment toehold entry and the mimicking principle this article explores the ability offirms to successfully enter against an initial monopolist by pursuing toehold entry sinking entry costs early and planning to produce only later we endow the incumbent with strongfirst mover advantages for example capital is the only input and is completely sunk and in each period the incumbent invests before entrants nevertheless the incumbent s profit can easily be negative if it tries to deter all entry when the market is growing the incumbent may need prohibitive capital in place early on because once toehold entry has occurred the incumbent s planned capital expansion might no longer be rational surprisingly even if market conditions remain stationary the incumbent may still allow some entry in the model some firms are always deterred showing that several firms can deter others more effectively than can a singlefirm the difference arises because onefirm cannot commit to mimicking the aggregate investment path that several independent firms would choose this mimicking principle offers a general perspective for understanding when a monopolist finds deterrence optimal

is there a dead spot new evidence on fomc decisions before elections using new data that chronicle the fed s internal forecast of the output gap from 1973 to 1998 this paper tests for an electoral cycle in the decisions of the federal open market committee fomc the paper provides evidence of a dead spot in the committee s decisions before presidential elections for given values of these internal forecasts the fomc is less likely to decide to tighten monetary policy in the year preceding a presidential election than at other times

wage bargaining and the phillips curve a macroeconomic view 1983 wage bargaining and the phillips curve a macroeconomic view applied economics vol 15 no 1 pp 61 71

a structural var approach on labour taxation policies this paper presents a structural var analysis on the employment and output effects of labour tax policies in six european countries for the period 1974 1997 by considering impulse response functions it turns out that on average a shock to the total personal income tax revenues is positively correlated to employment whereas there is mixed evidence on the output effect moreover the quantitative impact of these effects especially those related to the output appears to be quite small however by introducing explicitly four labour tax parameters namely the marginal and average tax rates for the personal income tax and the payroll tax it turns out that these effects are not negligible after all for some countries it is possible to conceive labour taxes as policy instruments favouring more employment and a better economic performance however the empirical support on the sign of the output and employment effects is mixed suggesting that the same domestic fiscal policy does not produce the same im

monetary policy and presidential elections a nonpartisan political cycle this paper develops a federal reserve reaction function which relates policy intentions to forecasts of policy objectives pre and postpresidential election estimates of this reaction function for the post accord period of 1953 1984 suggest two conclusions

partisan alignment effects on total factor productivity aray h partisan alignment effects on total factor productivity regional studies unlike the literature on political effects on real economy that suggests that partisan effects accrue through aggregate demand it is hypothesized that such effects could also accrue through aggregate supply using panel data for the spanish regions over the 1986 2010 period the main results are 1 partisan alignment effects only arise when central government enjoys a majority 2 there exist a positive contemporaneous effect and negative lagged effects and 3 in absolute value such effects vanish over time results are robust to different specifications and measures of total factor productivity tfp and methods of estimation

a political explanation of variations in central bank independence although central banks possess a similar function across the industrial democracies their institutional structures their levels of independence differ greatly my explanation of this variation emphasizes the informational asymmetries of monetary policymaking government ministers have informational advantages in the policy process potentially creating conflicts with backbench legislators and in a multiparty government coalition partners an independent central bank can help alleviate these conflicts politicians will choose an independent bank 1 if government ministers party legislators and coalition partners have different monetary policy incentives and 2 if government ministers fear that party legislators and coalition partners will withdraw their support over a policy dispute i statistically test the argument against the cross national variation of central bank institutions i also use the theoretical framework to examine episodes of institutional choice and reform in germany britain and italy

the bias towards zero in aggregate perceptions an explanation based on rationally calculating individuals i introduction a central theme in the study of economic behavior is individual rationality or utility maximizing behavior contrary to the accusations of many outside critics the economics assumption of rationality neither denies that information is costly nor implies that decisions are error free rational expectations allows for ignorance but insists on the absence of systematic errors in the aggregate even if some individuals make large underestimates their errors are offset by large overestimates made by others alternatively even if people on average underestimate the effect of some variable during one period they may overestimate its effect at a later date these assumptions form the basis for the standard conclusion that the government cannot systematically outsmart the public the theory and application of rational expectations has generated a vast literature over the last couple of decades it is now well known that the application of rational expectations theory to actual cases may for instance be unsuitable when there are systematic errors in the observed variables when loss functions are not quadratic or when variables are constrained to take only positive values while such limitations may well be problematic these objections have in our view not been very damaging in the sense that rational expectations still provides a natural starting point for much economic analysis like rational expectations this paper takes individual rationality as its central theme yet we reach a radically different conclusion from rational expectations regarding aggregate behavior we demonstrate that individual errors in identifying the relationships among variables cause a downward bias in the aggregate that would be equivalent to the public underestimating the strengths of the true relationships rational expectations has considered the misestimation type of error which can cancel out in the aggregate but with errors in identifying relationships there exists no similar cancelling out effect and thus the public appears to irrationally underestimate the strengths of relationships the paper is organized as follows first we set up a simple formal model to examine the misestimation problem and then contrast it to the identification problem section iii explains why the identification problem can be so important even when a relatively small number of variables are involved section iv reviews empirical evidence of bias in the expectations formation literature as shown in section v our hypothesis can be used to explain political business cycles in a standard aggregate supply and demand framework ii theory in our model individuals acquire knowledge in two steps they first identify the causal relationship between two or more variables and then estimate the strength of that relationship as with herbert a simon s satisficing approach 1959 1979 and the analysis in ronald a heiner 1988 we assume finite intellectual capabilities however our model neither assumes nor implies anything about simon s satisficing approach and the often related concept of bounded rationality instead our inquiry is strictly limited to the consequences of omitting variables and will not address the more ambitious question of what strategies individuals might adopt to improve learning like heiner we distinguish between the reliability of making decisions and the issue of obtaining information heiner shows that while decision making itself might be flawless when individuals face only a very limited amount of information it is optimal for them to choose a larger information set and enter into the imperfect decision zone he provides several different reasons finite channel capacity information complexity and nonlocal information for why the advantage of having much information also translates into more decision error while heiner s model deals with individuals making correct or incorrect decisions his underlying reasoning could equally well be used to motivate our analysis of why a portion of the population fails to appreciate certain economic relationships

surprise party estimating the consequences of unexpected presidential election results alesina s quarterly journal of economics 102 651 678 1987 influential model of presidential elections with ideologically motivated parties attributes higher growth and lower unemployment under democratic presidents to the surprise inflation a democratic victory entails in contrast to the published literature we test this hypothesis using calcula tions of presidential election surprises consistent with the assumption of rational economic actors we confront the econometric complications attending a time series approach tak ing into account economic growth dynamics we ultimately fail to confirm the hypothesis that the level of uncertainty associated with presidential election results has an effect on economic outcomes

opinion polls and political business cycles theory and evidence for the united states the paper shows that the frey schneider schultz hypothesis that there is a negative relation between the government s popularity and the government s incentives to engineer political business cycles is consistent with rational forward looking voting provided one makes appropriate assumptions about the incumbent s preferences the empirical part of the paper presents evidence favourable to the hypothesis using quarterly data on us money growth

appointment procedures and fomc voting behavior an important issue for the conduct of monetary policy in the united states is whether the various appointment procedures of members of the federal open market committee help determine their voting behavior it is usually asserted that the method by which district bank presidents are appointed leads to more independence and or more conservative behavior increased independence is generally believed to reduce suboptimal short run manipulation of monetary policy but at the cost of reducing the central bank s accountability to the country s short run and longrun objectives the social desirability of any potential differences in monetary policy resulting from these appointment procedures and the optimality of discretionary policy in general are not addressed in this paper however instead the effect on monetary policy of the different appointment procedures currently in place within the federal reserve system is examined does the increased independence that the district bank presidents supposedly possess produce significantly different monetary policy from that of the politically appointed board governors many studies have examined the effects various appointment procedures may have on voting at the fomc and the results have been somewhat mixed belden 2 chappell havrilesky and mcgregor 3 havrilesky and gildea 6 and puckett 8 find that bank presidents tend to vote for tighter policy than board governors while tootell 10 finds no differences between the two groups most of the literature has concluded that in some unclearly defined way and for no clear theoretical reason the more independent district presidents are more conservative than the board governors in this paper conservative is defined over several clear dimensions in order to test whether district presidents vote more conservatively than board governors some slight variation in the voting behavior of bank presidents and board governors is found but the causes of any dissimilarities are shown to be much different from those asserted in the earlier literature

interaction between central bank behaviour and fiscal policy the us case federal reserve behaviour is analysed using a model which incorporates an effect an effect of iscal pressure on monetary policy formulation incentive structures are hypothesized to be such that the central bank plans over a longer horizan than that relevant to the administration with the cyclically adjusted deficit proxying for fiscal pressure from the administration the response to the deficit then plays an interactive role in affecting the trade off weights applied to the competing goals of monetary policy the model performs well for the usa and provides a pattern of policy that is stable over the full 1961ndash 83 period

divisionalization and entry deterrence this paper assumes that incumbent firms can create new independent divisions more cheaply than potential entrants who must incur the additional overhead costs of new entry the main theoretical result is that such divisionalization ability leads perfectly informed incumbents to preempt all rational entry into their industries in contrast existing models of entry deterrence imply that informed incumbents even those with steadily decreasing average costs will often allow rational entry our result may explain why successful large scale entry by firms with no informational advantage is extremely rare the use of divisions to preempt entry may also explain why large firms in high profit oligopolies often divisionalize allowing their divisions to compete freely despite the negative pecuniary externality that each division imposes on others

the federal reserve s response to aggregate demand and aggregate supply shocks evidence of a partisan political cycle the orthodox approach to modeling the fed s response to economic conditions is to employ a monetary policy reaction function most reaction functions are estimated by regressing a policy indicator possibly the federal funds rate or a monetary aggregate on variables that describe the state of the economy such as unemployment inflation and growth in output under certain conditions which we discuss below estimated coefficients from a reaction function provide information about the fed s monetary policy priorities moreover extending the model to include election and partisan dummy variables may provide information about the fed s response to political pressures there are two problems with interpreting the coefficients in a standard reaction function as the weights that the fed attaches to its policy objectives first the monetary policy decision may not be represented accurately by an aggregate reaction function one that models the fed as a whole because there are twelve voting members on the fomc chappell havrilesky and mcgregor 10 have recently addressed this issue by employing a disaggregated set of reaction functions the second problem with interpreting reaction function coefficients as the weights the fed places on its policy objectives is that this interpretation implicitly assumes structural stability of the underlying macroeconomy abrams froyen and waud 1 31 acknowledge this shortcoming when they state coefficients from estimated reaction functions do not provide direct information on policymaker utility functions rather than being the solution to an unconstrained optimization dependent only on policymaker preferences reaction functions are the output of a constrained maximization where the constraints are the reduced form equations that characterize

product market competition and organizational slack under profit target contracts in a framework a la martin 1993 we introduce a common component in the managers private information in order to address three related questions what is the impact of contracts that reward managers on the basis of realized profits on firms productive and allocative efficiency relative to cost target contracts how do these contracts shape the relationship between competition and organizational slack can we then explain the existing evidence of an inverted u shaped relationship between competition and cost reducing activities as documented in aghion et al aghion p bloom n blundell r griffith r howitt p competition and innovation an inverted u relationship the quarterly journal of economics 120 pp 701 728 2005 we show that profit target contracts introduce a horizontal contractual externality between the competing firms that mitigates organizational slack and improves upon productive efficiency relative to cost plus mechanisms moreover when executive compensations are conditioned on profits an inverted u shaped relationship between product market competition and managerial effort obtains finally we also show that when contractual instruments are endogenous i e when shareholders can choose between profit and cost target rules the equilibrium with profit target contracts always exists and is the only one that survives to standard refinements