参考案例讲稿lecture

1、Lecture 9The political business cycle and Government failures1Market and government failuresGovernment have a role to play in addressing market failuresGovernment failure is the inability or unwillingness of the government to act primarily in the interest of its citizens. Reasons include:Political b

2、usiness cycleSize maximizing bureaucracyLeviathan theoryCorruption, rent-seeking2Origin of the political business cycleKramer (1971)Tried to explain the performance of Republican candidates for the House between 1896 and 1964 by the state of the economyVotes going to incumbents are inversely related

3、 to the rate of inflation and unemployment, and positively related to growth of e. %votes for incumbent = -0.41*inflation -0.001*d.unemployment +0.27* e3Objective of the lectureTo what extent do voters take into account macroeconomic performance when voting?To what extent is economic policy determin

4、ed by the struggle for votes?Does economic activity change over the election cycle?4OverviewMacroeconomic performance and political successOpportunistic politics modelPartisan politics modelEmpirical evidence: economics activity, inflation, monetary/fiscal policyWhich model fits data best?5Macroecon

5、omic performance and political successFinding 1: Aggregate economic activity before an election (output and inflation), has a significant effect on voting patterns in the United States and other countries.Positive effect of GDP growthNegative effect of unemployment and inflationCoefficients vary a l

6、ot across studiesDepends on countries, years, type of electionDifficult to predict elections based on economic performance only6Macroeconomic performance and political success7Additional factors affecting election resultsShort-term economy: The economy is not in recession during the election campaig

7、nIncumbencySocial unrestScandalForeign/military failure/successIncumbent charisma vs. challenger charismaIncumbent height vs. challenger heightFace 8Additional factors affecting election results Todorov et al. (2005): It is possible to predict 70% of elections just by looking at the face of candidat

8、esPictures of candidates for 32 Senate races shown to 127 subjectsCandidates rated on their competence. Those who look more mature are rated more competent and knowledgeableCompetence rating predicted the e of the election 70% of the time9Macroeconomic performance and political successUsing previous

9、 studies to predict future electionsExample: predicting the 2012 US Presidential elections:High unemploymentHigh gasoline pricesLow e growthbutThe economic trajectory is goodCharisma relative to opponent10Opportunistic politics modelAssumption 1: If voters weigh economic performance, then vote-seeki

10、ng politician will choose policies that win voters. Assumption 2: All politicians are identicalOpportunistic behaviorAssumption 3: Opportunism is based on the existence of an exploitable Phillips curve11Opportunistic politics model:Phillips curveTrade-off between inflation and unemploymentLow unempl

11、oyment puts pressure on wages and this creates inflationHigh unemployment means no wages pressure and low inflationinflationunemployment12BUT: inflation builds up gradually, whereas unemployment reduction is immediateOpportunistic politics modelIt is possible to increase economic activity today, in

12、exchange for more inflation in the future.Effect of expansionary economic policy (monetary/fiscal) immediate increase in economic activity upward pressure on wages inflation with increase but not immediatelyThe government can reduce unemployment in the short run, with inflation effect coming some ti

13、me later.13Opportunistic politics modelImplications:Preceding an election, the government stimulates the economy via monetary/fiscal policyAfter the election, the government reverses course, otherwise inflation will be out of controlThe same behavior is repeated each election cycle Political busines

14、s cycle14Opportunistic politics modelelectionExpansionary policyLower unemploymentContractionarypolicyHigher unemploymentInflation increases15Opportunistic politics modelGovernments may also have discretion in choosing when to call an election. Example: UK, France, ItalyIncumbents ensure elections t

15、ake place in favorable periodsJacques Chirac called for an early election for the French parliament in 1997.The economic situation was getting worseIf he waited longer, his party would have definitely losthe lost anyway16Opportunistic politics model- critiques -It assumes that voters are nave in the

16、 way they assess government performanceVoters reward expansionary policy although it will eventually increase inflationVoters should know that a reduction of unemployment is only temporaryIs it realistic to assume voter naivety? They reward/penalize incumbents for exogenous fluctuations in the busin

17、ess cycleConsider the variations in Obamas favorable/unfavorable ratings since 2009. 17Opportunistic politics- critiques -The model also assumes that the President has total control over the economyExpansionary monetary policy is decided by the Fed, which is independent of the executive branch.Fisca

18、l policy requires approval of Congress, which is frequently controlled by the other party. often, incumbents cannot use expansionary policies opportunistically18Partisan politics modelOpportunistic politics model: political parties dont have ideologies, they simply maximize the chances of winningHib

19、bs partisan politics model: Right-wing and left-wing parties (RWP, LWP) have different positions on economic issuesLWP represent low e people. Low e people are greatly affected by unemploymentLWP prioritize economic activity (and low unemployment) over low inflation19Partisan politics modelRWP repre

20、sent high e people. High e people are primarily concerned about inflation, because inflation reduces the value of their assetsRWP prioritize low inflation over economic activity (and low unemployment) Choose different points on the Phillips curve 20inflationunemploymentPartisan politics modelEffect

21、of macroeconomic performance on political success for different groups21Empirical tests: overviewPolitical cycle of:Economic activityInflationMonetary policyFiscal policyPartisan vs. opportunistic model in the data22Economic activityFinding 2: There is no significant increase in economic activity pr

22、ior to electionsQuarters after the electionGDP growth23InflationFinding 3: In many OCED countries, there is a clear post-electoral increase in inflation. In the US, there is evidence of such a post-electoral increase in inflation prior to 1979, but not after. 24Monetary and fiscal policyFinding 4: T

23、here is some evidence of pre-electoral increase in money growth in many countries. Finding 5: There is evidence of pre-electoral increases in transfers and other fiscal policy instruments in various countries. 25Monetary and fiscal policy26Summarizing the evidence Overall, mixed evidence for the opp

24、ortunistic politics model (OPM)Economic activity cycle does not support the OPMInflation cycle supports slightly the OPMMonetary policy supports slightly the OPMOpportunistic cycles are small and unsystematic27Why does the opportunistic model fail to explain data?The discretion governments have to m

25、anipulate fiscal policies is limited. The amount by which expenditures rise before elections tends to be modest (1-3%). This is hard to detect.Governments dont control monetary policy.Expansionary policies dont always work. The ability to create cycles is limited. Systematic opportunistic behavior m

26、ay be counterproductive if voters punish opportunistic policymakers.28Empirical tests of partisan modelsFinding 6: Economic activity is higher under Democrats than under Republicans in the first half of their termsDemocratic administrations pursue more expansionary monetary policies than Republican

27、administrations.The change of inflation is higher with Democrats than with Republican. The level of inflation does not seem to depend on the party in power. 29Empirical tests of partisan modelsQuarters after the electionGDP growth30Empirical tests of partisan models31Empirical tests of partisan modelsData mostly supports the partisan theoryResults are strong for growthResults are less strong for inflation because inflation is affected by many other variables, including oil pricesEvidence from OECD countries also shows that LWG prioritize low unemployment over low