An Analysis Of Political Business Cycle Theory and its Relationship with the New Political Macroeconomics

The paper analyses the four principal model types that comprise the political business cycle literature. It then considers how this literature complements the ‘new political macroeconomics’ in analysing the impact of politics on inflation. Political business cycle models can be classified according to the political motivations of opportunism and ideology as well as by the way in which individuals form expectations. Using this classifications we pay particular attention to the underlying assumptions of the models. The paper concludes that a satisfactory model should incorporate the possibility of both ideological and opportunistic behaviour. While some academics continue to frown at the political business cycle literature, the ‘new political macroeconomics’ has generally been well received, perhaps as a consequence of its foundations stemming from the new classical macroeconomic revolution of the 1970s. However, the two have common political foundations in exploring the effect of political incentives on macroeconomic variables. The incorporation of rational expectations by political business cycle theorists has united the two strands of literature to some extent and yet, as we explain, there remain factors that one can take from the political business cycle literature and incorporate within the new political macroeconomics.