Do expected downturns kill political budget cycles?

Frank Bohn and Jan-Egbert Sturm

The Review of International Organizations, 2021, vol. 16, issue 4, No 4, 817-841

Abstract: Abstract The political budget cycle (PBC) literature argues that governments expand deficits in election years. However, what happens when an economic downturn is expected? Will the government allow the deficit to expand even further, or will it resort to spending cuts and tax increases? When voters expect less than full automatic stabilization, our model shows that opportunistic government behavior leads to smaller deficits, thereby responding procyclically to expected downturns. Panel data evidence for 74 democracies covering the period 2000-2016 robustly supports the theoretical procyclicality prediction. Moreover, expected downturns remain significant when other context-conditional PBC effects are included in the empirical analysis.

Keywords: Political budget cycles; Elections; Growth expectations; Economic downturns; Precautionary voters; Automatic stabilization; Fiscal deficits (search for similar items in EconPapers)
JEL-codes: D72 E32 E62 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11558-020-09379-w

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