Natural Budget Deficit and Natural Political Cyclicality

Seyed Morteza Khani Hoolari and Vahid Taghinejad Omran

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we present a framework showing how governments use debt to flaunt competency and increase their votes and the chances of reelection; however, a cognitive bias, namely, the cyclist bias, would disrupt government’s computations. In this model the government’s budget deficit as well as changes in debt would be evaluated in a steady state. We show that debt is a double-edged sword and the more the government relies on debt to show its competency, the more the people understand the manipulations at work behind such measures. On equilibrium, due to cognitive bias in the behavior of individuals, the government will choose budget deficit which it is increasing, leading to the fall of the current incumbent and ultimately the opposition party would take over the power. The model can provide theoretical foundations for what the empirical study of Brender & Drazen (2008) concludes: expansive fiscal policies before elections won't increase reelection probability.

Keywords: Natural budget deficit; Natural political cyclicality; Cyclist bias (search for similar items in EconPapers)
JEL-codes: D72 E03 E32 E62 H30 H60 (search for similar items in EconPapers)
Date: 2017-04-04
New Economics Papers: this item is included in nep-mac and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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