Elections and macroeconomic policy cycles Anne Sibert

Kenneth Rogoff and Anne C. Sibert

No 271, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: There is an extensive empirical literature on political business cycles, but its theoretical foundations are grounded in pre-rational expectations macroeconomic theory. Here we show that electoral cycle in taxes, government spending and money growth can be modeled as an equilibrium signaling process. The cycle is driven by temporary information asymmetries which can arise if, for example, the government has more current information on its performance in providing for national defense. Incumbents cheat least when their private information is either extremely favorable or extremely unfavorable. An exogenous increase in the incumbent party's popularity does not necessarily imply a damped policy cycle.

Date: 1985
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