Electoral Business Cycles in OECD Countries

Studies of Organisation for Economic Co-operation and Development (OECD) countries have generally failed to detect real economic expansions in preelection periods, casting doubt on the existence of opportunistic political business cycles. We develop a theory that predicts that a substantial portion of the economy experiences a real decline in the preelection period if the election is associated with sufficient policy uncertainty. In particular, policy uncertainty induces private actors to postpone investments with high costs of reversal. The resulting declines, which are called reverse electoral business cycles, require sufficient levels of polarization between major parties and electoral competitiveness. To test these predictions, we examine quarterly data on private fixed investment in ten OECD countries between 1975 and 2006. The results show that reverse electoral business cycles exist and as expected, depend on electoral competitiveness and partisan polarization. Moreover, simply by removing private fixed investment from gross domestic product, we uncover evidence of opportunistic cycles.