IDEAS home Printed from https://ideas.repec.org/a/eee/poleco/v66y2021ics0176268020300823.html
   My bibliography  Save this article

Political forecast cycles

Author

Listed:
  • Bohn, Frank
  • Veiga, Francisco José

Abstract

A moral hazard model is used to show why overly optimistic revenue forecasts prior to elections can be optimal: Opportunistic governments can increase spending and appear more competent; ex post deficits emerge in election years, thereby producing political forecast cycles – as also found for US states in the empirical literature. Additionally, we obtain three theoretical results which are tested with panel data for Portuguese municipalities. The extent of manipulations is reduced when (i) the winning margin is expected to widen; (ii) the incumbent is not re-running; and/or (iii) the share of informed voters (proxied by education) goes up.

Suggested Citation

  • Bohn, Frank & Veiga, Francisco José, 2021. "Political forecast cycles," European Journal of Political Economy, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:poleco:v:66:y:2021:i:c:s0176268020300823
    DOI: 10.1016/j.ejpoleco.2020.101934
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0176268020300823
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejpoleco.2020.101934?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Merola, Rossana & Pérez, Javier J., 2013. "Fiscal forecast errors: Governments versus independent agencies?," European Journal of Political Economy, Elsevier, vol. 32(C), pages 285-299.
    2. Pina, Álvaro M. & Venes, Nuno M., 2011. "The political economy of EDP fiscal forecasts: An empirical assessment," European Journal of Political Economy, Elsevier, vol. 27(3), pages 534-546, September.
    3. Friedrich Heinemann, 2006. "Planning or Propaganda? An Evaluation of Germany's Medium-term Budgetary Planning," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(4), pages 551-578, December.
    4. Beate Jochimsen & Robert Lehmann, 2017. "On the political economy of national tax revenue forecasts: evidence from OECD countries," Public Choice, Springer, vol. 170(3), pages 211-230, March.
    5. Chatagny, Florian, 2015. "Incentive effects of fiscal rules on the finance minister's behavior: Evidence from revenue projections in Swiss Cantons," European Journal of Political Economy, Elsevier, vol. 39(C), pages 184-200.
    6. Shi, Min & Svensson, Jakob, 2006. "Political budget cycles: Do they differ across countries and why?," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1367-1389, September.
    7. Richard Boylan, 2008. "Political distortions in state forecasts," Public Choice, Springer, vol. 136(3), pages 411-427, September.
    8. Florian Chatagny & Nils Soguel, 2012. "The effect of tax revenue budgeting errors on fiscal balance: evidence from the Swiss cantons," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(3), pages 319-337, June.
    9. Frank Bohn & Francisco José Veiga, 2019. "Political Opportunism And Countercyclical Fiscal Policy In Election‐Year Recessions," Economic Inquiry, Western Economic Association International, vol. 57(4), pages 2058-2081, October.
    10. Thiess Buettner & Bjoern Kauder, 2015. "Political biases despite external expert participation? An empirical analysis of tax revenue forecasts in Germany," Public Choice, Springer, vol. 164(3), pages 287-307, September.
    11. Kenneth Rogoff & Anne Sibert, 1988. "Elections and Macroeconomic Policy Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(1), pages 1-16.
    12. Linda Veiga & Francisco Veiga, 2007. "Political business cycles at the municipal level," Public Choice, Springer, vol. 131(1), pages 45-64, April.
    13. Toke Aidt & Francisco Veiga & Linda Veiga, 2011. "Election results and opportunistic policies: A new test of the rational political business cycle model," Public Choice, Springer, vol. 148(1), pages 21-44, July.
    14. Tilman Brück & Andreas Stephan, 2006. "Do Eurozone Countries Cheat with their Budget Deficit Forecasts?," Kyklos, Wiley Blackwell, vol. 59(1), pages 3-15, February.
    15. Frank Bohn, 2018. "Political cycles: Beyond rational expectations," PLOS ONE, Public Library of Science, vol. 13(10), pages 1-23, October.
    16. Niels D. Gilbert & Jasper F.M. Jong, 2017. "Do European fiscal rules induce a bias in fiscal forecasts? Evidence from the Stability and Growth Pact," Public Choice, Springer, vol. 170(1), pages 1-32, January.
    17. Björn Kauder & Niklas Potrafke & Christoph Schinke, 2017. "Manipulating Fiscal Forecasts: Evidence from the German States," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 73(2), pages 213-236, June.
    18. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
    19. Boukari, Mamadou & Veiga, Francisco José, 2018. "Disentangling political and institutional determinants of budget forecast errors: A comparative approach," Journal of Comparative Economics, Elsevier, vol. 46(4), pages 1030-1045.
    20. Sjahrir, Bambang Suharnoko & Kis-Katos, Krisztina & Schulze, Günther G., 2013. "Political budget cycles in Indonesia at the district level," Economics Letters, Elsevier, vol. 120(2), pages 342-345.
    21. Luca Repetto, 2018. "Political Budget Cycles with Informed Voters: Evidence from Italy," Economic Journal, Royal Economic Society, vol. 128(616), pages 3320-3353, December.
    22. Susanne Lohmann, 1998. "Rationalizing the Political Business Cycle: A Workhorse Model," Economics and Politics, Wiley Blackwell, vol. 10(1), pages 1-17, March.
    23. Frank Bohn & Francisco José Veiga, 2019. "Elections, recession expectations and excessive debt: an unholy trinity," Public Choice, Springer, vol. 180(3), pages 429-449, September.
    24. Ivo Bischoff & Wolfgang Gohout, 2010. "The political economy of tax projections," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(2), pages 133-150, April.
    25. Beate Jochimsen & Robert Lehmann, 2017. "On the political economy of national tax revenue forecasts: evidence from OECD countries," Public Choice, Springer, vol. 170(3), pages 211-230, March.
    26. Frank Bohn, 2019. "Political budget cycles, incumbency advantage, and propaganda," Economics and Politics, Wiley Blackwell, vol. 31(1), pages 43-70, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:prg:jnlcfu:v:2022:y:2022:i:1:id:572 is not listed on IDEAS
    2. Cipullo, Davide & Reslow, André, 2022. "Electoral cycles in macroeconomic forecasts," Journal of Economic Behavior & Organization, Elsevier, vol. 202(C), pages 307-340.
    3. Israel García, 2023. "Budget Forecast Errors in Spanish Municipalities: The Role of Transparency," MAGKS Papers on Economics 202327, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    4. Florian Brugger & Jörn Kleinert, 2019. "The strong increase of Austrian government debt in the Kreisky era: Austro-Keynesianism or just stubborn forecast errors?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(2), pages 229-248, May.
    5. Fabio Padovano & Pauline Mille, 2023. "Education, fake news and the Political Budget Cycle," Economics Working Paper from Condorcet Center for political Economy at CREM-CNRS 2023-01-ccr, Condorcet Center for political Economy.
    6. Jiří Šindelář, 2022. "The accuracy of state budget planning: case of the Czech Republic [Úspěšnost plánování státního rozpočtu ČR]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2022(1), pages 35-58.
    7. Oriola, Hugo, 2023. "Political monetary cycles: An empirical study," European Journal of Political Economy, Elsevier, vol. 79(C).
    8. Crombach, Lamar & Bohn, Frank & Sturm, Jan-Egbert, 2024. "The “Benefits” of being small: Loose fiscal policy in the European Monetary Union," Journal of Public Economics, Elsevier, vol. 234(C).
    9. Frank Bohn & Xue Wang, 2022. "Rational erraticism," Journal of Theoretical Politics, , vol. 34(2), pages 219-235, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frank Bohn & Francisco José Veiga, 2019. "Political Budget Forecast Cycles," NIPE Working Papers 12/2019, NIPE - Universidade do Minho.
    2. Boukari, Mamadou & Veiga, Francisco José, 2018. "Disentangling political and institutional determinants of budget forecast errors: A comparative approach," Journal of Comparative Economics, Elsevier, vol. 46(4), pages 1030-1045.
    3. Picchio, Matteo & Santolini, Raffaella, 2020. "Fiscal rules and budget forecast errors of Italian municipalities," European Journal of Political Economy, Elsevier, vol. 64(C).
    4. Beate Jochimsen & Robert Lehmann, 2017. "On the political economy of national tax revenue forecasts: evidence from OECD countries," Public Choice, Springer, vol. 170(3), pages 211-230, March.
    5. Björn Kauder & Niklas Potrafke & Christoph Schinke, 2017. "Manipulating Fiscal Forecasts: Evidence from the German States," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 73(2), pages 213-236, June.
    6. Frank Bohn, 2018. "Political cycles: Beyond rational expectations," PLOS ONE, Public Library of Science, vol. 13(10), pages 1-23, October.
    7. Frank Bohn, 2019. "Political budget cycles, incumbency advantage, and propaganda," Economics and Politics, Wiley Blackwell, vol. 31(1), pages 43-70, March.
    8. Mancini, Anna Laura & Tommasino, Pietro, 2023. "Fiscal rules and the reliability of public investment plans: Evidence from local governments," European Journal of Political Economy, Elsevier, vol. 79(C).
    9. Cronin, David & McInerney, Niall, 2023. "Official fiscal forecasts in EU member states under the European Semester and Fiscal Compact – An empirical assessment," European Journal of Political Economy, Elsevier, vol. 76(C).
    10. Lamar Crombach & Frank Bohn, 2024. "Uninformed voters with (im)precise expectations: Explaining political budget cycle puzzles," Economics and Politics, Wiley Blackwell, vol. 36(1), pages 275-311, March.
    11. Ademmer Martin & Boysen-Hogrefe Jens, 2022. "The Impact of Forecast Errors on Fiscal Planning and Debt Accumulation," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 242(2), pages 171-190, April.
    12. Manuela Krause, 2019. "Communal fees and election cycles: Evidence from German municipalities," ifo Working Paper Series 293, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    13. Frank Bohn & Francisco José Veiga, 2019. "Elections, recession expectations and excessive debt: an unholy trinity," Public Choice, Springer, vol. 180(3), pages 429-449, September.
    14. García, Israel & Hayo, Bernd, 2021. "Political budget cycles revisited: Testing the signalling process," European Journal of Political Economy, Elsevier, vol. 69(C).
    15. Israel García, 2023. "Budget Forecast Errors in Spanish Municipalities: The Role of Transparency," MAGKS Papers on Economics 202327, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    16. Cipullo, Davide & Reslow, André, 2022. "Electoral cycles in macroeconomic forecasts," Journal of Economic Behavior & Organization, Elsevier, vol. 202(C), pages 307-340.
    17. Aidt, Toke S. & Mooney, Graham, 2014. "Voting suffrage and the political budget cycle: Evidence from the London Metropolitan Boroughs 1902–1937," Journal of Public Economics, Elsevier, vol. 112(C), pages 53-71.
    18. Florian Dorn, 2021. "Elections and Government Efficiency," ifo Working Paper Series 363, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    19. Eric Dubois, 2016. "Political Business Cycles 40 Years after Nordhaus," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01291401, HAL.
    20. David Cronin & Niall McInerney, 2024. "Institutional Quality and Official Budgetary Forecast Performance in EU Member States," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 80(2), pages 165-192.

    More about this item

    Keywords

    Opportunistic political budget cycles; Deficit; Revenue forecasts; Forecast errors; Asymmetric information; Political economy;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:poleco:v:66:y:2021:i:c:s0176268020300823. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505544 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.