Rationalizing the Political Business Cycle: A Workhorse Model

Susanne Lohmann

Economics and Politics, 1998, vol. 10, issue 1, 1-17

Abstract: An incumbent policymaker has incentives to expand the money supply prior to elections to stimulate the economy and thereby further her chances of re‐election. In its original formulation, the Nordhaus political business cycle hypothesis relies on adaptive inflation expectations and naive retrospective voting. This article develops a simple model of a political cycle in inflation and output growth, assuming rational inflation expectations and rational retrospective voting. Voter scrutiny of the incumbent's economic performance has policy and selection effects, with ambiguous consequences for welfare: the policymaker manipulates the money supply for electoral purposes, but an incumbent of above average quality is more likely to remain in office.

Date: 1998
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