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The political business cycle: An extension of Nordhaus's model

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Zusammenfassung

Das Modell vonNordhaus (1975) über den Politischen Konjunkturzyklus wird in diesem Artikel erweitert, indem explizit die Beziehung zwischen dem ökonomischen Bereich (repräsentiert durch die Phillips-Kurve) und der Fiskalpolitik hergestellt wird. Dieses erweiterte Modell führt zu der Hypothese, daß während einer Legislaturperiode die Budgetpolitik in der ersten Hälfte restriktiv und in der zweiten Hälfte expansiv ist. Als Konsequenz dieser Politik kommt es zu einer Verringerung der Arbeitslosigkeit (einem Anstieg der Inflation) vor Wahlen und einem Anstieg der Arbeitslosigkeit (einer Verringerung der Inflation) nach den Wahlen. Diese Hypothese wird an Hand österreichischer Daten mit Hilfe eines nichtparametrischen Tests geprüft (was zu einer Ablehnung unserer Hypothese für Österreich führt). Das quantitative Ausmaß des durch den Politischen Konjunkturzyklus entstehenden bias wird dann mit Hilfe von politischen Simulationen im Rahmen eines makroökonomischen Modells demonstriert.

Summary

Nordhaus's (1975) model of the political business cycle is extended in this paper by explicitly formulating the link between the economic sphere (represented by the Phillips curve) and fiscal policy. This extended model yields the hypothesis that during an electoral period the budgetary policy is contractionary in the first half and expansionary in the second half with the consequences of a reduction in unemployment (increase in inflation) before elections and a rise in unemployment (decrease in inflation) after elections. This hypothesis is tested against the data of the Austrian economy by a non-parametric test (which leads to a rejection of our hypothesis for Austria). The extent of the political business cycle bias is demonstrated by policy simulations within a macroeconomic model.

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Abbreviations

AK :

Public purchases of goods and services + public investment (A.S.)

AT :

Unemployed persons, in total (in 1.000)

AZA :

Worked hours per worker (in hours)

BAU :

Central government's expenditures (outlays) in total (A.S.)

BEI :

Central government's revenues (receipts) in total (A.S.)

BS :

Budget deficit of the Central government (A.S.)

CB :

Labour supply (in 1.000)

CH :

Unemployment rate (%)

CON :

Public consumption (A.S.)

COR :

Public consumption (A.S. 1964)

CPN :

Private consumption (A.S.)

CPR :

Private consumption (A.S. 1964)

CUB :

Current balance (A.S.)

DS :

Direct taxes + public income from property-transfers to households + transfers from households (A.S.)

DX :

DS-public income from property (A.S.)

D7273 :

Dummy for monetary policy and Dummy for change from gross turnover tax to VAT (1972+1; 1973−1; other 0)

D7278 :

Dummy for investment tax (1972+1; 1973−1; 1977+1; 1978−1; other 0)

D73US :

Dummy for shift of employers to employees (1973+1; other 0)

D7375 :

Dummy for incomes tax reform (1973−1; 1975−1; other 0)

D7778 :

Dummy for extra VAT (1977+1; 1978−1; other 0)

EBE :

Population in total (in 1.000)

EET :

Employment in total + unemployed (total labour supply; in 1.000)

ESE :

Employers (in 1.000)

EUS :

Employees (in 1.000)

FBN :

Monetary base (A.S.)

FGN :

Money M1 (A.S.)

FG :

Money M1 (A.S. 1964)

GDN :

Gross domestic product (A.S.)

GDR :

Gross domestic product (A.S. 1964)

GER :

Energy (1.000 t/TCE)

GIR :

Industry output (A.S. 1964)

GE :

Profits in total (A.S.)

GV :

Profits in total (A.S. 1964)

IS :

Indirect taxes—transfers to firms (A.S.)

ITN :

Gross fixed investment (A.S.)

ITR :

Gross fixed investment (A.S. 1964)

JR :

Final domestic demand (A.S. 1964)

LA :

Stocks and statistical discrepancies; National account basis (A.S.)

LEAD :

Difference of one major party over the other in parliament in percentage points

LB :

Foreign balance (A.S.)

LKV :

Long term capital transactions (A.S.)

MA :

Money M1 + profits (A.S. 1964)

MMN :

Imports of goods and services (A.S.)

MMR :

Imports of goods and services (A.S. 1964)

OIN :

Public investment (A.S.)

OKG :

Public purchases of goods and services (A.S.)

PC :

Private consumption deflator (1964=100)

PEN :

Energy prices (1964=100)

PI :

Gross fixed investment deflator (1964=100)

PK :

Imports of goods and services deflator (1964=100)

PL :

Exports of goods and services deflator (1964=100)

PT :

Gross domestic product deflator (1964=100)

RES :

Value change in balance of payments reserves (A.S.)

RIR :

Interest rate for long term bonds (%)

SD :

Stocks and statistical discrepancies; National account basis (A.S. 1964)

ST :

Overall indirect taxes—subsidies; National account basis (A.S.)

STD :

Direct taxes (A.S.)

STI :

Indirect taxes (A.S.)

TAH :

Transfers to households (A.S.)

TBB :

Trade balance (A.S.)

TTT :

Time (1960, 1961,..., 1979)

TUN :

Transfers to firms (A.S.)

TVH :

Transfers from households (A.S.)

VW :

Gross fixed investment plus exports of goods and services (A.S. 1964)

WON :

Changes in foreign currency reserves of the National Bank (A.S.)

WKU :

Changes in foreign currency reserves of all commercial banks (A.S.)

WW :

Changes in balance of payments' official reserves (A.S.)

XB :

Relative energy prices (1964=100)

XXN :

Exports of goods and services (A.S.)

XXR :

Exports of goods and services (A.S. 1964)

YLN :

Wages and salaries (compensation of employees; A.S.)

YOB :

Public income from property (A.S.)

YVN :

Net disposable income (A.S.)

YY :

Net disposable income (A.S.)

YYN :

National income (A.S.)

ZST :

Statistical discrepancies in balance of payments (A.S.)

A.S:

billion Austrian Schilling at current prices

A.S. 1964:

billion Austrian Schilling at constant prices (basis 1964)

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Authors
  1. Fritz Breuss
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Breuss, F. The political business cycle: An extension of Nordhaus's model. Empirica 7, 223–259 (1980). https://doi.org/10.1007/BF00924952

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