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What Is a Political Business Cycle in Economics

Undemocratic leaders are also incentivized to allocate budgets and loans to their strategic partners, but without regular elections, they will have little incentive to engage in opportunistic manipulation of fiscal or monetary policy. However, their time horizon can be shortened by immediate threats to survival such as war. In general, political economic cycle theorists believe that democratic politicians will manage monetary and fiscal policy less responsibly than undemocratic leaders or politicians in regimes with less political competition. Seasonally adjusted annual GDP data for the U.S. economy for the period 1950-2013 are available in International Financial Statistics (IFS). The real annual GDP growth rates of the U.S. economy, calculated using 2009 as the base year, are presented in Table 4.1, while Fig. Figure 4.2 shows the graph, where the real GDP growth rate is shown on the vertical axis. Table 4.2 summarizes the dates, names, and political affiliations of presidents in the United States from the early 1950s to 2013.

Table 4.3 shows the correspondence between election years and the growth rates of the election year, the 2 years preceding the election year and the 2 years following the election year. The political economic cycle hypothesizes that GDP growth rates tend to be higher as the election year approaches, partly because of high election spending and partly because the incumbent president and the ruling party must deliver results to succeed economically. One interpretation is that institutions such as constitutional separation of powers in the budget process are necessary to resist pro-cyclical fiscal policies, and these institutions are more often lacking in developing countries.91Brender and Drazen (2005) propose a different interpretation: the identification of a political budget cycle in a wide range of countries is supported by the experience of „new democracies” – most of which are developing or developing. Countries in transition are driven by fiscal manipulation by The incumbent government succeeds politically because voters are inexperienced with elections. Once these countries are removed from the larger sample, the political budget cycle disappears. One way to examine the existence of the political economic cycle is to use the example of the United States, where presidential elections are held every 4 years, and the campaign was mainly conducted between the Republican Party and the Democratic Party. The Republican Party is, by and large, pro-business and mimics free-market capitalism, while the Democratic Party tends to rely more on social benefits in domestic politics, even though both parties share similar values of freedom and democracy. Choosing the US economy is easier because elections are held every 4 years. Other democratically elected countries may not have a fixed period between elections, and the period of one political regime may differ from another, resulting in one regime lasting longer or shorter than another.

The tendency to depoliticize monetary policy by making central banks independent of political struggle raises serious concerns about the public accountability of policymakers. Some people believe that taking monetary policy out of the hands of publicly responsible politicians is a threat to democracy because it limits the scope of policies that can be pursued by those politicians. The study on political economic cycles finds that economic activities have often been used as a means and instrument for political ends. While this is inevitable, economic activities in the political business cycle could be „divided” into various short-term economic policies to achieve policy objectives. Given the ideological differences between the two parties in the United States, one would obviously expect different economic performance under different political regimes and leaders. There may be other explanations for the political economic cycle, and there may be other reasons for the movement of the U.S. economy`s growth trend. Nevertheless, the use of economic instruments for political purposes can create a pattern of economic growth that evolves with the political scene. While no one can understand what else might have happened, the economic outcome of political economic cycles may not be the best or most appropriate for long-term growth and development. The appropriate strategy would be to allocate resources in such a way that some take into account short-term activities, while allocating funds wherever possible for long-term economic development.

Ultimately, political regimes are essentially political, but economic growth and development can improve the long-term performance of the economy. Political scientists have often cited regime types as an influential cause of public policy, particularly when studying the political determinants of economic policy. In the 1960s, scholars openly questioned whether economic development in the postcolonial world would require authoritarian governments. In the mid-1970s, the end of the post-war period of growth and manifestations of domestic political instability led some theorists to propose the beginning of a crisis of democratic governability even in advanced industrial countries. Empirical studies of contemporary political cycles have recently drawn more attention to political cycles than to business cycles, as policy instruments should be manipulated to influence the economy. The absence of evidence on political business cycles would be consistent either without manipulation or with policy cycles that would not have the desired effect due to other exogenous factors and crude macroeconomic policy. There seems to be strong evidence of modern political cycles, even when economic and political data is weak or non-existent. (See, for example, Alesina, Roubini, & Cohen, 1999.) With the exception of the well-documented Nixonion political cycles, there has been no attempt to document the occurrence of historical political cycles.