Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/235095 
Year of Publication: 
2020
Series/Report no.: 
KOF Working Papers No. 481
Publisher: 
ETH Zurich, KOF Swiss Economic Institute, Zurich
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.
Subjects: 
political budget cycles
elections
growth expectations
economic downturns
precautionary voters
automatic stabilization
fiscal deficits
JEL: 
D72
E32
E62
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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