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Do Expected Downturns Kill Political Budget Cycles?

Jan-Egbert Sturm () and Frank Bohn ()

No 20-481, KOF Working papers from KOF Swiss Economic Institute, ETH Zurich

Abstract: The political budget cycle (PBC) literature argues that governments expand de cits in election years. However, what happens when an economic downturn is expected? Will the government allow the de cit 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 de cits, 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 signi cant when other context-conditional PBC e ects 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)
Pages: 49 pages
Date: 2020-06
New Economics Papers: this item is included in nep-mac and nep-pol
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