NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Theory of Political and Economic Cycles

Laurence Ales, Pricila Maziero, Pierre Yared

NBER Working Paper No. 18354
Issued in September 2012
NBER Program(s):   EFG   POL

We develop a theoretical framework in which political and economic cycles are jointly determined. These cycles are driven by three political economy frictions: policymakers are non-benevolent, they cannot commit to policies, and they have private information about the tightness of the government budget and rents. Our first main result is that, in the best sustainable equilibrium, distortions to production emerge and never disappear even in the long run. This result is driven by the interaction of limited commitment and private information on the side of the policymaker, since in the absence of either friction, there are no long run distortions to production. Our second result is that, if the variance of private information is sufficiently large, there is equilibrium turnover in the long run so that political cycles never disappear. Finally, our model produces a long run distribution of taxes, distortions, and turnover, where these all respond persistently to temporary economic shocks. We show that the model's predictions are consistent with the empirical evidence on the interaction of political and economic cycles in developing countries.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18354

Users who downloaded this paper also downloaded these:
Drazen The Political Business Cycle After 25 Years
Ordonez w18360 The Asymmetric Effects of Financial Frictions
Razin and Rosefielde w18352 A Tale of Politically-Failing Single-Currency Area
Gordon w18315 Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds
Brunnermeier and Oehmke w18398 Bubbles, Financial Crises, and Systemic Risk
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us