temporal aggregation in political budget cycles electoral cycles have been widely debated since the pioneering studies of the 1970s on monetary and fiscal policy 1 drazen sums up the evidence in terms of active fiscal policy and passive monetary policy while expansionary fiscal policy is the main impulse behind electoral cycles monetary policy has an accommodating role 2 recently there has been a flurry of empirical work on political budget cycles pbcs using cross country panels the most influential works concentrate on the budget surplus because it can capture both increases in expenditures and tax cuts before elections and is thus the most sensitive indicator of aggregate pbcs 3a drawback of these extant studies is their reliance on annual observations since elections take place between january and december annual data do not allow one to identify the election year precisely to get around this problem other schemes have been proposed for example by the rule of the semester the previous year is counted as the election year if elections take place before july 4 what are the consequences of temporal aggregation for the measurement of pbcs instead of being concentrated in the election year pre electoral effects may be spread out over the two years leading up to elections more important if the sign of policies is reversed after elections lower frequency data may mask pbcs because the effects in the election year cancel out as akhmedov and zhuravskaya point out in their country study of russia 5to illustrate the differences between using annual and quarterly data to identify the election year imagine that elections take place in june furthermore assume there is a pre electoral deterioration in the budget surplus surplus 1 during the four quarters running up to elections followed by an improvement surplus 1 the next four quarters in the calendar year in which elections take place the net effect on the budget surplus is zero elections are not always in june of course what happens if elections are evenly spread out over the year table 1 presents a simulation where y 0 is the calendar year of elections y 1 is the year before and y 1 is the year after for elections in the first quarter of the election year namely y 0 q 1 our textbook example of a pre electoral expansion in the deficit during the four quarters prior to elections followed by a contraction the next four quarters implies that the surplus equals 1 from y 1 q 2 to y 0 q 1 it equals 1 from y 0 q 2 to y 1 q 1 and it equals 0 otherwise when the budget surplus is at its average value normalized here at zero the same procedure is followed for elections in the other three quarters if we aggregate the effects by calendar year there is a serious underestimation of pbcs in the election year since pre electoral expansions are almost cancelled out by post electoral contractions leaving a net expansive effect that is only 25 percent of the total stimulus before elections the least affected by temporal aggregation are post electoral fiscal adjustments since 62 5 percent of the total effect is reflected the year after elections on the other hand if there were no post electoral fiscal adjustments the problem of temporal aggregation would be much less severe since 62 5 percent of the total expansive effect would be reflected the calendar year of elections and 37 5 percent the year before this paper tackles the issue of temporal aggregation in pbcs head on we build a cross country panel with annual and quarterly data from nineteen latin american countries and twenty member states of the organization for economic cooperation and development oecd over the 1980 2005 period 6 quarterly data allow us to identify the election year more precisely with annual data the election year is the calendar year in which elections take place with quarterly data the election year comprises the election quarter plus the three prior quarters we introduce two nonstandard features in our analysis

managerial control of international firms and patterns of direct investment abstract formal analyses of international firms have concentrated on advantages from large operations due to for example economies of scope however the standard framework implicitly assumes the existence of managerial costs for running international operations the paper develops a model that explicitly incoporates both economies of scope and costs of managerial control of large and international operations it highlights the potential importance of international firms organizational structure suggesting a qualitative difference between situations where international firms have different stages of production located in different countries and situations where firms in addition have the same stage located in different countries

endogenous market structures in international trade natura facit saltum abstract almost all of the large literature on international trade with imperfect competition assumes exogenous market structures the purpose of this paper is to develop a simple model that generates alternative market structures as nash equilibria for different parameterizations of the basic model equilibrium market structure is a function of the underlying technology familiar configurations such as a duopoly competing in exports or a single multinational producing in both markets arise as special cases small tax policy changes can produce large welfare effects as the equilibrium market structure shifts implying discontinuous jumps in prices quantities and profits

regulation factor rewards and international trade this paper develops an approach for incorporating regulation into the theory of production distribution and trade using environmental regulation as an example four major conclusions emerge in the course of the analysis 1 production process regulation is equivalent in its effect on other cooperating factors to neutral technical regress i e negative progress 2 specific unambiguous income redistribution consequences follow from such regulation if commodity prices are held constant the factor used relatively intensively in the non regulated industry will gain absolutely in terms of both goods 3 unilateral or uncoordinated regulation destroys the link between uniform world commod ity prices and identical factor proportions factors prices across trading countries or regions 4 if any factor of production is freely mobile across frontiers the least differential regulation as between countries will entirely drive out the regulated industry from the more to the less regulated economy

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

foreign direct investment and inflation author affiliation selin sayek department of economics bilkent university bilkent ankara 06800 turkey e mail sayek bilkent edu tr acknowledgment i am very grateful to my advisor kent kimbrough for his support and help without which this research wouldn t have been possible i would also like to thank robert conrad enrique mendoza ed tower and dennis yang for their guidance and helpful comments i have also received valuable comments from duke university macroeconomics workshop participants and royal economic society 2001 conference participants as well as the two referees all errors remain mine 1 introductionin recent years interest in understanding the determinants of foreign direct investment fdi has intensified hand in hand with an increasing volume of fdi flows from 1990 to 2005 the total worldwide fdi inflows increased from 203 billion to 974 billion almost all developing countries are competing to attract a major share of these inflows in fact the share of net fdi inflows in the gross domestic product gdp of middle income countries has risen from 0 74 in the 1970s to 1 08 between 1985 and 1994 and to 2 85 between 1995 and 2005 1 the intensified competition to attract more fdi has led to changes in the regulatory frameworks provided by almost all countries according to the recent world investment report unctad 2003 during the period 1991 2002 around 95 of the changes in worldwide laws governing fdi have been favorable to multinational firm activity establishment of investment promotion agencies as well as provision of fiscal incentives have accompanied these improvements in local regulatory environments given the objectives of host countries to attract high quality investments and to ensure benefits from such foreign activity it is important to fully understand the factors influencing the fdi flows this article primarily studies the role of inflation among the factors that drive fdi inflation rates have increased from around 5 to 10 on average in developing countries during the 1970s followed by an increase of 49 on average among developing countries between 1985 and 1994 this trend of increasing inflation rates has been reversed in the late 1990s the inflation rates in developing countries have on average declined to 9 2 during 1995 2004 a period during which the net fdi inflows as a share of gdp have more than doubled in the middle income countries given the focus among developing countries to attract more fdi it is interesting to analyze whether the increasing inflation rates in the 1970s and 1980s might have been a deterrent for fdi inflows and whether their reversal in the 1990s might have contributed to the increase in fdi inflows to these economies despite not providing conclusive evidence the coincidences of high inflation and low fdi versus the low inflation and high fdi inflows into these developing countries motivates investigation of the possible links between the two variables therefore the broad objective of this framework is to study the effects of inflation on the investment decision of multinational enterprises mnes changes in inflation rates of the domestic or foreign country are anticipated to alter the net returns and optimal investment decisions of the mne in studying the explicit role of inflation in determining the investment pattern of mnes across domestic and foreign locations i use a model that is in fact discussing an investment smoothing behavior of the mne that faces domestic and foreign nominal shocks in this framework the act of investment smoothing captures a shift of investments across locations and not across time my argument is in line with aizenman 1992 who notes that the goal of diversifying exposure to country specific shocks induces producers to become multinationals this investment smoothing behavior can further be thought of as a production flexibility approach where the mne can shift production and trade decisions depending on the relative favorability of conditions in the two countries as discussed in sung and lapan 2000

an essay on the rationality of economic policy the test case of the electional cycle the literature on electional cycles is discussed in the light of the empirical findings by in particular the author two basically different types of explanations of such cycles are compared explanations based on the maximizing behavior of governments aiming at re election explanations building on the insufficiently controlled pressures of events in a democracy it is demonstrated that even when the most well known theory under the nordhaus macraemodel is a rather fragile construction a more robust argument termed the popularity investment argument can be constructed yielding the same basic result from the empirical literature it is concluded that almost the opposite pattern actually occurs in the data it is finally demonstrated that the weak but significant empirical pattern is easy to explain by the elections generate promises which give most real expansion in the second governmental year and most inflation in the third year an average behavior which hardly implies even medium term maximization by governments as assumed under

multinational corporations and trade structure first a model of horizontally and vertically integrated firms is developed these firms are then embedded in a general equilibrium model of trading countries it is shown how multinational corporations emerge as a result of differences across countries in factor compositions intersectoral intraindustry and intrafirm trade can coexist and intrafirm trade takes place in invisibles headquarter services and intermediate inputs it is shown how the various trade components depend on the structure of the world economy the model predicts trade patterns which are close to observed trade patterns the importance of multinational corporations in the conduct of foreign trade has been recognized for many years nevertheless there exists no well articulated theory that explains the conditions for their emergence and predicts under these conditions a structure of trade that comes close to observed trade patterns i have developed in helpman 1984 a theory which is designed to fill in this gap and it is the purpose of this paper to extend it in order to make it better fit reality my earlier work builds on the standard theory of monopolistic competition in differentiated products in which every firm produces a single variety the distinguishing feature of that study is the interpretation of the technology so as to allow for specialized inputs which service plants that are geographically separated from the location of the inputs employment in particular those inputs can be located in one country and service plants located in other countries management and product specific rd multinational corporations have often production facilities in several countries see for example u s tariff commission 1973 chapter iii moreover in my earlier work all intra firm trade consisted of trade in the services of the specialized inputs i e in headquarter services while empirically a large part of intra firm trade takes place in intermediate inputs see buckley and pearce 1979 hence there is a need to extend the theory in order to take account of these missing features and in order to evaluate their contribution to the explanation of trade patterns this task is undertaken in the following sections by incorporating the model of the horizontally and vertically integrated firm from helpman 1983 into the theory of

popular protest and political budget cycles a panel data analysis we test the hypothesis that governments facing popular protest are more likely to use fiscal policy for re election purposes employing data of 65 democratic countries both developed and developing over the period 1975 2005 using the number of anti government demonstrations and general strikes in pre election years as measures of popular protest our results lend support to this hypothesis the effect of protest on the manipulation of fiscal policy for re election purposes is strongest in young democracies

fiscal policy cycles and public expenditure in developing countries the paper studies empirically the fiscal policy instruments by which governments try to influence election outcomes in 24 developing countries for the 1973 1992 period the study finds that the main vehicle for expansionary fiscal policies around elections is increasing public expenditure rather than lowering taxes and public investment cycles seem particularly prominent institutional mechanisms which constrain discretionary expenditure policies and which strengthen fiscal control are therefore worthwhile considering to prevent opportunistic policy making around elections

electoral cycles and the earnings of federal bureaucrats this paper analyzes the relationship between the timing of federal elections and the pay raises received by civilian employees of the federal government the theoretical framework discusses how electoral wage cycles are generated as a result of optimizing behavior on the part of voters bureaucrats and the government the empirical analysis uses a time series of wage rates for the twenty eight largest federal agencies over the period 1961 1978 the study indicates that pay hikes during the presidential election year are significantly greater about 2 to 3 percent higher than bureaucratic pay raises in other years

foreign direct investment exchange rate variability and demand uncertainty variable real exchange rates influence the location of production facilities chosen by a multinational with risk averse investors and fixed productive factors parent companies should not be indifferent to production location even with identical expected costs of production across countries if a nonnegative correlation exists between export demand and exchange rate shocks the multinational optimally locates some productive capacity abroad the capacity share abroad increases as exchange rate volatility rises and becomes more correlated with export demand shocks these results are confirmed using quarterly u s bilateral foreign direct investment flows with canada japan and the united kingdom copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

does there exist a political business cycle a box tiao analysis theories of the political business cycle are by now common they range from the elegant theoretical work of nordhaus 1975 to the essentially empirical work of tufte 1978 they all assume that politicians manipulate the economy to aid their reelection efforts in particular politicians manipulate macroeconomic policy to create a boom just before election day golden and poterba 1980 provide an excellent review of this literature both tufte and nordhaus provide casual evidence for the existence of a political business cycle using inflation and unemployment rates as indicators of macroeconomic outcomes tufte and nordhaus predict at a minimum that unemployment should be decreasing before election day if presidents are really manipulating the economy very well then unemployment should be at a minimum in the october before the election and hence should be rising after the election in the nordhaus version the economy pays for the pre election boom with a post election surge in the inflation rate nordhaus also suggests that the president should engineer a recession early in his term to reduce inflationary expectations tufte 1978 20 presents graphs of the unemployment series and claims that visual examination shows them to be generally consistent with the hypothesis however he provides no statistical tests of the hypothesis nor does he estimate the quantitative impact of elections on unemployment tufte does not examine the inflation series nordhaus restricts himself to comparing unemployment rates in the two years preceeding and following an election with a simple nonparametric test supporting the hypothesis the literature provides several good empirical tests of the political business cycle hypothesis both paldam 1979 and mccallum 1978 test for the existence of four year cycles and find none however they do not test for discontinuous changes in the series around election day golden and poterba examine whether the use of policy instruments changes near election day and

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

the political theory of the business cycle two strands of recent empirical work pose a challenge for the macro theorist when brought together one is the rational expectations interpretation of the business cycle the other is the political theory of the business cycle this paper attempts a reconciliation of these two strands in a theory where national political parties have to satisfy the preference of their own supporters as well as the floating voter the implications are that party voters evaluate government performance with respect to expected inflation and output and their variances and that parties will pursue different feedback rules

public sector price controls and electoral cycles public enterprise prices are important policy instruments in developing economies this is why public sector price polices constitute a key element of stabilization programmes implemented in these economies however this significance is not specific to stabilization episodes first this study questions whether an opportunistic politician can manipulate public prices to win elections it analyses the impact of such price controls on budget deficits and the repercussions of alternative financing mechanisms of these deficits on the inflation rate and voters behaviour it is shown that electoral inflation cycles are obtained under domestic debt financing whereas money financing does not permit such a manipulative policy second by focusing on data of the turkish economy for the 1987 1 2003 12 period empirical evidence for such manipulative policies is given

reassessing the integration of european electricity markets a fractional cointegration analysis this study extends existing literature on the assessment of electricity market integration in europe by developing and testing hypotheses on the convergence of electricity wholesale prices and adopting a time varying fractional cointegration analysis in addition the potential impacts of some special events that may affect system capacity new interconnection market coupling increase in share of intermittent generation on spot and forward markets are considered and evaluated daily spot prices from february 2000 to march 2013 of nine european electricity spot markets apx uk apx nl belpex epex fr epex de ipex nordpool omel and ote and month ahead prices in four markets french british german and dutch from november 2007 to december 2012 are investigated results show that unit root tests which are generally used in the literature to test market integration are inadequate for assessing electricity spot market convergence because spot prices are found to be fractionally integrated and mean reverting time series furthermore spot price behaviour and their association with different markets change over time reflecting changes in the eu electrical system one month ahead prices by contrast were found to have become more resilient to shocks and to follow more stable trends

political budget cycles the case of the western german lander this paper focuses on the issue of the electoral andideological cycles in state government budget for the elevenwestern german lander we verify this hypothesis over theperiod 1974 1994 for the following budgetary variables totalexpenditures surplus deficit administration health care education roads and social security benefits while overallour results seem to show that generally the party variabledoes not play a systematic role in spending decisions theyprovide some support to the opportunistic cycle theory showingthat the only relevant phenomenon is the effect of theupcoming election on the government spending inclinations

behavioral and institutional determinants of political business cycles the link between business cycles and the democratic politicalsystem has long been recognized by economists however thedeterminants of political business cycles are not well understood we discuss several institutional and behavioral determinants ofthose cycles such as revolving door appointments term limits andpreferences of the incumbent politician electorate and businesscommunity concerning the intertemporal pattern of publicexpenditure we show how they affect the cycle s amplitude in thecontext of a rational expectations model

the impact of selected abatement strategies on transnational pollution the terms of trade and factor rewards a general equilibrium approach abstract widespread publicity of international conflict over transfrontier pollutants such as acid deposition and the november 1986 chemical spill in the rhine river has increased the public s awareness of the need to devise abatement strategies appropriate for transnational pollution this article develops a general equilibrium approach for analyzing the economic impacts of selected abatement strategies the model includes internationally mobile goods capital and pollution flows and flexible output and factor prices the general equilibrium approach provides policymakers with important information which is usually not revealed by a partial equilibrium approach that is demonstrated by applying the model to the north american acid deposition issue

on the existence of a political monetary cycle this paper examines electoral influence on monetary policy as measured by ml money growth i find a significant four year electoral cycle in money growth even when controlling for the influence of interest rates income and budget deficits further the residual electoral cycle produces the income and inflation movements associated with the political business cycle when it is used in simulations of simple reduced form macro models the paper concludes by discussing the difficulties in rationalizing cyclical monetary policy with rational expectations

multinationals multi plant economies and the gains from trade a general equilibrium model of a multinational enterprise based on economies of multi plant operation is developed these economies are modelled as arising from the existence of a joint input whose productivity in each production facility is independent of the number of facilities maintained by a firm the multinational thus offers the world increased technical efficiency by eliminating the duplication of the joint input that would occur with independent national firms since this technical efficiency may come at the expense of increased market power the full determinants of home country host country and world welfare are considered

presidential politics budget deficits and monetary policy in the united states 1960 1976 this paper has focused on the extent to which the traditional tools of macroeconomic management in the united states monetary and fiscal policy have contributed to a political business cycle regardless of whether politicians can successfully influence real economic variables to their own ends the evidence presented here suggests that they tried and that they enjoyed some at least indirect aid from their independent monetary authorities in doing so several major conclusions emerge

the merits of horizontal versus vertical fdi in the presence of uncertainty we examine the impact of uncertainty on vertical and horizontal fdi our model shows that greater supply uncertainty reduces the expected income from vertical fdi but increases the expected income from horizontal fdi greater demand uncertainty adversely affects the expected income under both production modes uncertainty about predatory actions by the host country is more costly to the multinational under vertical than under the horizontal mode we examine sales by foreign affiliates of u s parent companies conditioning on host country characteristics thought to influence fdi we find evidence that volatility and sovereign risk have a greater negative impact on vertical fdi than on horizontal fdi

evolutionary voter sophistication and political business cycles the concept of the sophisticated electorate is central to many contemporary political economic models however no existing studies have yet clarified how voters could develop a sophisticated way of evaluating economic performance this study suggests a transitional hypothesis that removes the constraint that voters have prior knowledge about the macroeconomic environment and the true economic intent of the incumbent government the hypothesis permits behavioral innovation from learning and predicts that the evolutionary process toward sophistication may be triggered by socially suboptimal political business cycles that reveal the self serving characteristic of the government the empirical analyses using recent japanese experiences show that japanese political support behavior shifted from naivete to sophistication in the early 1970s after political manipulation occurred in the 1969 and 1972 parliamentary elections

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

does the fed contribute to a political business cycle in contrast to findings of other studies evidence is presented to support the existence of a federal reserve induced political monetary cycle that corresponds to the u s presidential election cycle using various taylor rules we find support for the view that fed policy turns significantly more expansionary in the seven quarters prior to the election but only when the fed chair and incumbent presidential party have partisan affiliations

the power to tax analytical foundations of a fiscal constitution preface 1 taxation in constitutional perspective 2 natural government a model of leviathan 3 constraints on base and rate structure 4 the taxation of commodities 5 taxation through time income taxes capital taxes and public debt 6 money creation and taxation 7 the disposition of public revenues 8 the domain of politics 9 open economy federalism and taxing authority 10 toward authentic tax reform prospects and prescriptions epilogue notes selected bibliography index

reliable and unreliable partisan appointees to the board of governors every new appointment to the board of governors in recent years has triggered speculation as to how the new governor will vote in fomc meetings while several studies have hinted at partisan voting behavior by governors no study has yet attempted to identify reliable and unreliable partisan voting behavior and to pinpoint the background characteristics of governors that distinguish between the two this paper indicates that board members with a background in economics consistently voted in line with the economic ideology of the appointing president noneconomists on the board however displayed no such partisan voting behavior and were seen to be influenced by pressures emanating from the administration and by the monetary environment prior to their appointment over the 1951 to 1987 period most presidents have appointed reliable governors earlier in their presidential terms when the returns from being able to influence subsequent monetary policy are great and have chosen unreliable governors later in their terms when election support from the interest groups that these unreliables represent is important the results of the present paper suggest skepticism toward the recent spate of rational expectations game theoretic models which feature a dictatorial policy maker gaming atomistic market participants whose only political activity voting generates monetary surprises followed by convergence to an equilibrium because of their obsession with the ceremonial formalism of their genre these models ignore a vast complementary literature and as a consequence display conspicuously flimsy institutional and historical premises instead the present paper argues for the greater relevance of models of uncoordinated interaction between multiple political and private principals and federal reserve agents

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

the electoral budget cycle this article begins with a review of the now substantial literature on the thesis that polticians manipulate governmental outputs so as to favor their chances of reelection it concludes that while this electoral cycle thesis was initially overstated by its proponents it retains more plausibility than recent critics have allowed this conclusion is then demonstrated through an analysis of expenditures by the ten provincial governments in canada between 1951 and 1984

tax structure turbulence in oecd countries this paper analyses whether and to what extent politiciansmanipulate tax structures strategically in order to winelections or for ideological purposes we introduce anindicator for tax structure turbulence which measures thedegree to which a country s tax structure changes from oneyear to another using data on 18 oecd countries over theperiod 1965 1995 we find clear evidence of a politicalbudget cycle in national tax structures more precisely wefind that in election years tax structures are changedsignificantly less than in other years further thedispersion of political power significantly lowers the abilityof governments to change the tax structure we do not however find any evidence of partisan budget cycles innational tax systems following political regime changes

impact of electricity prices on foreign direct investment evidence from the european union in the course of recent years growing concerns over increasing energy prices have emerged in the context of maintaining europe s international competitiveness in particular rising electricity price differentials adversely affect firms total production costs and ultimately impact their investment decisions nonetheless electricity prices as locational determinants of foreign direct investment fdi have received little attention in the literature so far we address this gap by including electricity prices in the traditional framework of fdi analysis and examine the impact of price variation on net fdi inflows in countries of the european union eu we use a panel of 27 countries for a period of 2003 2013 and system generalised method of moments gmm as method of estimation the main findings of the paper confirm that besides tax rates unit labour costs and competitive disadvantage in secondary education also electricity prices contribute to eroding competitiveness of the countries yet the effect of electricity prices does not seem to be uniform across the eu in fact southwestern countries tend to be more adversely affected than north eastern both in the short and long run

endogenous elections electoral budget cycles and canadian provincial governments the existence of manipulative electoral budget cycles and opportunistic election setting is examined in the framework of a parliamentary democracy empirical tests are conducted using a pooled time series cross section data set derived from canadian provincial governments over the 1962 1992 period evidence in support of the electoral budget cycle hypothesis but not the opportunistic election timing hypothesis is obtained

in search of yardstick competition a spatial analysis of italian municipality property tax setting this paper uses italian local government data to test for fiscal interaction arising from yardstick competition to discriminate yardstick competition from competing theories of strategic interaction we account for the incentives and constraints generated by the electoral system in particular for the presence of term limits and the size of the majorities supporting the mayors estimation of a local property tax setting equation uncovers positive spatial auto correlation in local tax rates of jurisdictions where the mayors run for re election in uncertain contests while interaction is absent where either mayors face a term limit or are backed by large majorities

explaining the size of the public sector this paper aims at providing an explanation for the size of the public sector based on the idea of social insurance the main assumption made is that the public sector is less efficient but also less volatile than the private sector the demand driven level of the public sector that is derived as the one that maximizes the utility of the representative employed consumer depends positively on the variance of private output an increase in the size of the public sector has a positive effect on expected employment and a negative effect on expected consumption the size of the public sector set by the government which maximizes the probability of being re elected will be higher than the demand driven level if voters preferences for employment is higher than the consumption loss associated with public employment

political business cycles in the parliamentary system abstract in the parliamentary system the cabinet may call a general election before the term of the house members matures if the timing is judged favorable econometric tests to differentiate the following two hypotheses are proposed and applied to the japanese data under the manipulative cabinet hypothesis the cabinet decides the timing of the election by political reasons and manipulates an economy to have a boom in time i e elections cause booms similar to the presidential system while the opportunistic cabinet hypothesis states that the cabinet does not manipulate the economy but calls an election when positive private sector shocks cause high growth and low inflation i e booms trigger elections findings indicate that the japanese cabinet has acted opportunistically rather that manipulatively

monetary policy signaling from the administration to the federal reserve this chapter employs the index of monetary policy signaling from the administration to the federal reserve safer that was developed in chapter two the safer index is a simple weekly sum of articles that appeared in the wall street journal in which administration officials expressed a desire for easier 1 or tighter 1 monetary policy a key assumption is that systematically over time the financial media capture the essence of communication that is going on between the executive branch and federal reserve officials 1 the signaling index is employed in ordinary least squares regressions for the period from january 1964 to november 1991 cumulative values of the safer index over a three week period as an explanatory variable are found to have a statistically significant effect on the average federal funds rate during the third week as the dependent variable further evidence suggests that the safer index is granger causal with respect to the federal funds rate after classifying the signals by sources within the administration oval office council of economic advisers treasury and other and unidentified sources it is shown that for the overall 1964 1991 period signals from the treasury department and from other and unidentified sources have a statistically significant effect on the federal funds rate while signals from the oval office and the council do not when the data are segmented according to who was the chairman of the federal reserve board at the time ordinary least squares results indicate that the federal reserve did not systematically respond to executive branch signaling in a statistically significant way when william mcchesney martin g william miller and alan greenspan were chairmen but did respond statistically significantly to administration signaling during portions of the periods during which arthur burns and paul volcker were chairmen

party differences in macroeconomic policies and outcomes although the nature of the differences between parties in democratic electoral politics is an enduring question in political science surprisingly little is understood about the subject but substantial progress has been made in recent years most notably in understanding party differences in macroeconomic policies and outcomes the first breakthrough was douglas hibbs s 1977 analysis of party related differences in the unemployment rate in his time series analysis for the united states hibbs modeled the path of unemployment as an autoregressive moving average process subject to a dummy variable intervention term indicating party of the president his analysis indicated that democratic administrations were associated with lower unemployment than republicans by 2 36 points after eight years in office and even larger differences in long run equilibrium a subsequent article by nathaniel beck 1982 addressed the same issue and found the party differences less sharp when administration specific policy differences are considered the techniques employed by hibbs and beck focus directly on an outcome unemployment rather than on the policy instruments that are presumably responsible for altering outcomes this approach can be misleading when there are long lags between implementation of policies and ultimate effects or when shocks occasionally intrude upon the regular connections between instruments and outcomes macroeconomic theories can provide information about constraints linking macroeconomic variables but hibbs and beck fail to incorporate theoretical constraints such constraints could help determine what kinds of outcomes are feasible and sustainable and to what extent outcomes are induced by policies as opposed to shocks our purpose here is to consider how one might go about estimating party differences in a framework that takes advantage of some insights offered by macroeconomic theories and to report some preliminary results a more complete description of the analysis is provided in our working paper available upon request

an integrated test for electoral cycles in the u s economy this paper offers the first integrated test of the electoral model of business cycles the test begins with unrestricted estimates of presidential electoral patterns in u s economic outcomes real gnp unemployment and inflation and policies money growth and the adjusted budget surplus these estimates are then used to determine whether the estimated electoral patterns in macropolicy yield predicted electoral patterns for macro outcomes that are consistent with estimates of both actual electoral patterns in outcomes and voting behavior the results indicate that four year electoral cycles in macroeconomic outcomes and policies are strongly significant for the united states for the period 1951i to 1986ii copyright 1989 by mit press

international and domestic constraints on political business cycles in oecd economies the effect of increased capital mobility on the national control of macroeconomic policy continues to be a topic of debate empirical contributions to this debate share the assumption that domestic macroeconomic policy is driven by either partisan or countercyclical motivations and that the effects of international financial flows have roughly similar effects in all countries this article reevaluates the integration hypothesis in a framework in which manipulations of the macroeconomy derive from opportunistic motivations the article emphasizes the ways in which prior institutional choices effect the way these motivations are translated into actions evidence from individual country and pooled time series tests suggests that opportunistic cycles are less likely to occur when 1 a government maintains a fixed exchange rate in the presence of highly mobile capital or 2 when the central bank enjoys above average independence

monopoly capital organized labor and military expenditures in the united states 1949 1976 in this paper we systematically assess the neo marxian view that military expenditures are used by the state as a countercyclical fiscal policy either to forestall a serious recession or to facilitate economic recovery in particular we examine the post world war ii political economic experience of the united states because the military expenditures thesis was most fully developed initially in an attempt to explain postwar american prosperity we evaluate what we term the naive model of baran and sweezy which suggests that the degree to which national output is absorbed by military spending should be dependent on aggregate economic conditions such as unemployment finding only inconsistent evidence to support the naive view we incorporate the insights of recent neo marxists especially o connor on the linkages among the monopoly corporate sector the unionized sector of labor and the state the empirical evidence appears consistent with this modified view with unemployment in the unionized sect

military keynesianism in the united states 1949 1976 disaggregating military expenditures and their determination this paper examines military expenditures in the united states 1949 1976 at a less aggregate level than was done by griffin devine and wallace assuming that distinctive and independent causal processes generate each of four subcategories that include nearly all military spending griffin devine and wallace s model can be transposed with little modification to the two most generously financed subcategories equipment and personnel however their model casts little light on the determination of spending for operations and maintenance and research and development still the level of industrial concentration emerges as an important source of spending on military research development and this fact is consistent with suggestions in galbraith s discussion of the planning sector preelection increases in military spending appear to be efficiently earmarked for increases in the pay of military personnel

first evidence of asymmetric cost pass through of eu emissions allowances examining wholesale electricity prices in germany abstract we test the hypothesis that rising prices of emission allowances have a stronger impact on wholesale electricity prices than falling prices asymmetric cost pass through using an autoregressive distributed lag model we confirm this hypothesis for the german market

the effects of politics on local tax setting evidence from france this paper investigates the hypothesis that local politics has an impact on local taxation in the french public sector by using a cross sectional dataset on departments in 1999 political variables are included in a tax setting equation to provide empirical evidence whether local governments in france adopt business taxation behaviour closer to the leviathan government hypothesis with higher tax rates when political competition decreases or to the partisan government hypothesis with differences in tax rates according to partisan variables it is shown that the wider the seat s margin the lower the tax rates and that this cut is weaker in the case of a left wing local majority than a right wing majority it is therefore concluded that the partisan government hypothesis is more supported by the french data than the leviathan one even after controlling for tax interdependencies between departments

political models of the business cycle should be revived political models of the business cycle have typically been ignored because they appear inconsistent with rational behavior and because empirical evidence is inconclusive this paper addresses the second issue demonstrating for u s real gnp unemployment and inflation that electoral cycles persistent patterns across electoral terms are significant but apparently only for republican incumbents and that partisan cycles persistent differences between parties are also significant these findings are consistent with the conjecture that a minority party is more constrained by electoral concerns whereas a majority party is freer to pursue partisan objectives

monetary and real shocks productive capacity and exchange rate regimes where producers may diversify internationally international diversification is shown to inuuce a positive correlation between the volatility of productivity shocks and investment in the presence of a phillips curve the expected gnp is lower under a floating exchange rate regime than under a fixed exchange rate regime this result applies both for real and monetary shocks attempts to reduce foreign direct investment by capital controls will tend to reduce welfare without affecting our results regarding the ranking of exchange rate regimes implies that in the presence of market power uncertainty tends to reduce investment in the first part of the paper i demonstrate the international diversi fication of production modifies this result foreign direct investment tends to offset the impact of market power on the concavity of the profit function by weakening the relative price effect associated with output changes and by increasing the flexibility of adjusting the variable input hence international diversification of production is shown to induce a positive correlation between the volatility of productivity shocks and investment the second part of the paper utilizes the framework presented in section i to re examine the welfare ranking of exchange rate regimes in the presence of capital mobility as is well appreciated a one dimensional answer regarding the merits of a fixed exchange rate regime will not do justice to the host of issues relevant for making the choice between exchange rate regimes the second part of the paper focuses on one aspect of the debate the linkages between volatility domestic and foreign direct investment and productive capacity a frequent argument in favour of exchange rate stability relates to the potential cost of exchange rate volatility which may work to increase the cost of international trade and to reduce its volume yet efforts to detect the adverse effects of exchange rate volatility on trade volumes in the last two decades have not delivered clear cut results in fact the experience of international trade among the united states canada europe and japan suggests that there is no natural

electricity wholesale market prices in europe convergence abstract this paper tests the hypothesis that the ongoing restructuring process in the european electricity sector has led to a common european market for electricity based on a principal component analysis pca of wholesale electricity prices in 2002 2006 we reject the assumption of full market integration for several pairs of countries the weaker hypothesis of bilateral convergence is accepted based on unit root tests kpss and adf and a convergence test based on filtered pairwise price relations this indicates that the efforts to develop a single european market for electricity were so far only partially successful we show that the daily auction prices of scarce cross border transmission capacities are insufficient to explain the persistence of international price differentials empirically our findings confirm the insufficiency of explicit capacity auctions as stated in the theoretical literature

environmental policy when market structure and plant locations are endogenous abstract a two region two firm model is developed in which firms choose the number and the regional locations of their plants both firms pollute and market structure is endogenous to environmental policy there are increasing returns at the plant level imperfect competition between the home and the foreign firm and transport costs between the two markets at critical levels of environmental policy variables small policy changes cause large discrete jumps in a region s pollution and welfare as a firm closes or opens a plant or shifts production to from a foreign branch plant the implications for optimal environmental policy differ significantly from those suggested by traditional pigouvian marginal analysis

disentangling patterns of state debt financing we examine the determinants of change in state government indebtedness from 1961 through 1989 using a pooled time series cross sectional analysis the analysis reveals that debt is primarily a function of economic conditions reflecting both the need to borrow and the capacity of states to repay debt however political factors such as culture partisan competition and electoral cycles also affect state debt we also find very weak evidence that tax and expenditure limitations ironically may increase state indebtedness while constitutional debt limitations have no effect upon slowing the growth of state debt

presidential elections and federal reserve policy an empirical test traditional macro economic models of federal reserve fed behavior typically assume that the fed enjoys a well defined objective function based on social welfare and generally predict counter cyclical monetary policy the increasing observation of procyclical monetary policy has led many researchers to investigate new models of fed behavior several recent papers imply that procyclical fed behavior is due to a lack of political accountability friedman 7 toma 23 and shughart and tollison 21 all attribute considerable bureaucratic discretion to the fed and seek to explain monetary policy by examining typical bureaucratic objectives other papers such as pierce 19 20 weintraub 26 and kane 10 11 argue that the fed operates in an arena filled with political constraints that cause sub optimal monetary policy but these constraints are not modeled explicitly one possible political constraint on fed behavior is the incumbent president s desire for re election in the political business cycle pbc literature presidential re election opportunities are enhanced by the production of a precise set of inflation and unemployment outcomes leading up to the election thus to the extent that presidents desire cyclical macro economic outcomes there will be executive pressure on the fed to create or accommodate such outcomes the effect this pressure will have on fed policy is ultimately an empirical question but most models deal with it by assumption traditional macro modeling assumes a zero effect while the pbc models implicitly assume that a favorable election cycle is a primary goal of all economic policymakers this paper examines presidential influence on the federal reserve by testing for an election cycle in money growth the major result is the identification of a regular 16 quarter cycle in money growth corresponding with presidential elections this cyclical effect is found to be stable over time and significant under a wide range of model specifications further when the cyclical component of money growth is used to simulate a simple macro model it produces a classic political business cycle in inflation and real output growth

an empirical investigation of the strategic use of debt the paper examines the accumulation of debt by swedish local governments i find that right wing governments accumulate more debt when facing a higher probability of defeat whereas the opposite occurs for left wing governments these effects are sizable a right wing government increases its level of debt by 15 percent whereas a left wing government decreases its debt by 11 percent if they are both certain of being replaced as compared to when they are certain of remaining in office the results are consistent with the predictions from a strategic debt model developed by persson and svensson

determinants of foreign direct investment a tale of nine theoretical models abstract this paper presents a review of nine theoretical models of foreign direct investment fdi discussed are early studies of determinants of fdi 1 as well as determinants of fdi based on the neoclassical trade theory 2 ownership advantages 3 aggregate variables 4 the ownership location and internalization advantage framework 5 horizontal and vertical fdi models 6 the knowledge capital model 7 diversified fdi and risk diversification models 8 and policy variables 9 from each of the nine theories the relevant determinants of fdi are derived empirical studies indicate the importance of these determinants in the real world the paper shows that there is not one single theory of fdi but a variety of theoretical models attempting to explain fdi and the location decision of multinational firms therefore any analysis of determinants of fdi should not be based on a single theoretical model instead fdi should be explained more broadly by a combination of factors from a variety of theoretical models such as ownership advantages or agglomeration economics market size and characteristics cost factors transport costs protection risk factors and policy variables

electoral manipulation via voter friendly spending theory and evidence abstract we present a model of the political budget cycle in which incumbents try to influence voters by changing the composition of government spending rather than overall spending or revenues rational voters may support an incumbent who targets them with spending before the election even though such spending may be due to opportunistic manipulation because it may also reflect sincere preference of the incumbent for types of spending voters favor classifying expenditures into those which are likely targeted to voters and those that are not we provide evidence supporting our model in data on local public finances for all colombian municipalities our findings indicate both a pre electoral increase in targeted expenditures combined with a contraction of other types of expenditure and a voter response to targeting

determinants of foreign direct investment empirical evidence from eu accession candidates this study examines bilateral foreign direct investments fdi between the members of the european union and eight central and east european candidate ceec economies in transition awaiting accession into the european union eu crosssection data were obtained for bulgaria czech republic estonia hungary poland romania slovak republic and slovenia for 1997 once the main characteristics of fdi recipient and donor nations are identified in a bilateral framework it will be feasible to predict future fdi inflows this study reveals that the key determinants of fdi inflows in ceecs are size of the host economy host country risk labour costs in host country and openness to trade countries that are receiving fewer foreign investments could make themselves more attractive to potential donor nations by focusing on some of the key determinants identified by this study

politics and business cycles in industrial democracies politics alberto alesina influences from political competition on macroeconomic policy are often thought to be a source of economic fluctuations politicians are described as being driven by two not mutually exclusive main motivations they want to be reelected and they harbour political or ideological biases when such theories are confronted with actual cycles in a number of industrial countries the pattern of inflation unemployment output and budget deficits indicates that partisan policy making is a fairly widespread phenomenon with more limited evidence that electoral preoccupations result in major fluctuations the combination of partisanship and electoral cycles may easily result in socially undesirable outcomes in particular the degree of politico institutional stability and the independence of the central bank have a bearing on macroeconomic outcomes these observations raise a number of important questions about the design of political institutions

strategic investments and the development of multinationals a model of multinational behavior is presented in which either the existence or absence of multinationals can be a nash equilibrium outcome the key determinant is the relationship between plant scale economies a force for geographic centralization and multiplant economies plus transport costs leading to multinationality the model predicts that multinational enterprise production arises when firm specific and transportation costs are large relative to plant scale economies the latter are both a technological and a strategic variable in the entry decision copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the impact of central bank independence on political monetary cycles in advanced and developing nations this paper examines the extent to which monetary policy is manipulated for political purposes during elections we do not detect political monetary cycles in advanced countries or developing nations with independent central banks we do find evidence however in developing countries that lack central bank independence furthermore we find some evidence that these cycles are not caused by monetization of election related fiscal expansions this suggests that pressure by politicians on the central bank to exploit the phillips curve may be an important factor in generating political monetary cycles

the determinants of foreign direct investment in transition economies a meta analysis in this paper we conduct a meta analysis of studies that empirically examine the relationship between economic transformation and foreign direct investment fdi performance in central and eastern europe and the former soviet union over the past quarter century more specifically we synthesise the empirical evidence reported in previous studies that deal with the determinants of fdi in transition economies focusing on the impacts of transition factors we also perform meta regression analysis to specify determinant factors of the heterogeneity among the relevant studies and the presence of publication selection bias we find that the existing literature reports a statistically significant non zero effect as a whole and a genuine effect is confirmed for some fdi determinants beyond the publication selection bias

valuation of risky assets in arbitrage free economies with transactions costs abstract this paper analyzes the equilibrium valuation of risky assets in the case where transactions costs are present the methodology involves applying theorems of the alternative farkas lemma as a consequence of arbitrage free markets under relevant assumptions it is found that the price of an asset having transactions costs is the corresponding price that would obtain in a perfect market plus a fudge factor this latter factor is provided explicit bounds

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

political cycles in nontraditional settings theory and evidence from the case of mexico abstract we create a rotating bandit model of executive turnover in politics with autocratic presidents large and centralized governments and limited reelection the model is an extension of mcguire and olson s 1996 work we apply our model by studying the relationship between electoral cycles and economic growth and inflation uncertainty in mexico a country with a highly centralized and powerful government no reelection and until recently little political competition we find a significant postelection economic collapse but no preelection boom which is contrary to the predictions of the traditional political business cycle model we also find evidence that elections create rather than resolve inflation uncertainty which contradicts the predictions of the rational partisan model while our rotating bandit model is largely consistent with the results we find more work is needed on the real effects of politics in the developing world

political budget cycles in indonesia at the district level we find significant political budget cycles pbcs for indonesian districts only for direct not for indirect elections pbcs are significantly stronger if the incumbent runs for reelection they are well identified due to the exogenously different timing of elections

optimum electoral areas should europe adopt a single election day abstract the paper lies at the intersection between the literature on macroeconomics and politics and the literature on coordination it uses models of political business cycles in an open economy setting to investigate the costs and benefits of forming electoral areas i e regions where countries share the same electoral calendar both opportunistic and partisan models are considered the main finding of the paper is that the desirability of an electoral area between two countries is enhanced when the spillovers between these countries are large and positive and when they face symmetric shocks or are of comparable size

random timing of elections and the political business cycle in his 1975 paper nordhaus formally proves that governments whose aim is to be reelected will generate political business cycles empirical results do not confirm this proposition especially in countries used to early elections