Do incumbent governments try to manipulate fiscal and monetary policy instruments so as to get re-elected and stay in office? Since the mid-seventies political economists have embarked in theoretical endeavours to address this question. They have tried to explain the interaction between political and macroeconomic variables in the election of new governments by looking at the dynamics between the electorate and the incumbent. This approach has two important features: (i) voters are assumed to maximise their individual utilities, and (ii) the incumbent is assumed to implement those policies that allow her to retain power. The incumbent stimulates the economy to acquire the maximum number of votes so as to get re-elected, and this stimulus in turn causes the economy to fluctuate around its long-run path. A Political Business Cycle (PBC) is therefore the economy’s fluctuation around its long-run behaviour generated by the political system (Paldman 1997: 342). In other words, the PBC literature studies how interest groups and political pressures within a country influence its macroeconomic performance.
This field of study can be divided into two main waves of research: (i) the opportunistic models, and (ii) the partisan models. The first one, pioneered by Nordhaus (1975), identifies a cycle in the ‘opportunistic’ behaviour of politicians interested only in their re-appointment: the incumbent stimulates the economy before the election period so as to get re-elected. The partisan approach presented in the seminal work by Hibbs (1977) identifies a ‘partisan’ cycle in which different parties, when in office, implement different policies: the left-wing party tackles unemployment, and the right-wing party fights inflation.
These non-rational-expectations analytical frameworks were further developed during the mid-eighties to incorporate rational expectations. The works by Cukierman & Meltzer (1986), Rogoff (1990), and Persson & Tabellini (1990) include rational expectations into the ‘opportunistic’ framework first developed during the mid-seventies. Alesina (1987, 1988a, b) on the other hand builds a rational expectations model using a ‘partisan’ framework. The departure from the non-rational-expectations frameworks has two main implications: (i) voters can not be systematically fooled in equilibrium; that is, an incumbent’s repeated ‘opportunistic’ behaviour is punished by the electorate, and (ii) economic activity is less influenced by economic policies in general (Alesina 1995: 146).
The purpose of this paper is to spell out the opportunistic and partisan models under the non-rational-expectations and rational-expectations framework and explain their intuition. The first part presents the non-rational- and rational-expectations opportunistic models. The second part then delves into the non-rational and rational expectations partisan models. Finally, an overview is presented and future lines of research suggested.