Shaking rivers and budget cycles : a comprehensive framework

Abstract

The 1990s were host to a variety of political economy papers that tried to explain why and how incumbents would use fiscal resources strategically to get reelected. Under the main argument, a politician might be inclined to increase spending/reduce taxes when close to an election to increase their reelection probabilities, even if this goes against their preferences (i.e. a party increases expenditure even if it’s right-leaning) or if it harms the economy in the long run (by reducing the stream of resources in the future). Allegedly, this literature - called the political budget cycle literature - wanted to endow the experiences of the Reagan administration (among others) with a rationale, especially those near the end of his second term. In this thesis I will focus on two objectives. First, I will study the US case to try to understand whether these dynamics are present there, if they are heterogenous across parties and how they are affected by the likelihood of being reelected. Secondly, I will develop a theoretical framework in which parties use fiscal variables detrimentally to enhance their chances at reelection, and explore the interplay between election prospects and the behavior of the incumbent regarding fiscal variables.