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Nordhaus: The political business cycle

Disclaimer. Don't rely on these old notes in lieu of reading the literature, but they can jog your memory. As a grad student long ago, my peers and I collaborated to write and exchange summaries of political science research. I posted them to a wiki-style website. "Wikisum" is now dead but archived here. I cannot vouch for these notes' accuracy, nor can I even say who wrote them. If you have more recent summaries to add to this collection, send them my way I guess. Sorry for the ads; they cover the costs of keeping this online.

Nordhaus. 1975. The political business cycle. Review of Economic Studies 42: 169-190.

The Political Problem: Political Business Cycles

THE BASIC PROBLEM: politicians in democracies have little reason to value future (post-election) consumption. Thus, although private investors can sacrifice short-term consumption to make long-term investments, public investors (politicians) have difficulty doing so. The general pattern is to see a degree of macroeconomic austerity towards the beginning of a politician's term, then lots of spendinig at the end (to get ready for the election).

According to the widely-accepted (at the time) but now discredited Philips curve, there is a trade-off between unemployment and inflation.

Possible Solutions

Summary of the Argument

In the long run:

In the short run:

Philips curve [now discredited]: There's a tradeoff btw inflation and unemployment.

Microfoundations:

In the long run, we discount the future too heavily, so voters want lower unemployment and higher inflation than is optimal.

In the short run, we see the political business cycle. But here's where myopia comes in: when evaluating an incumbent, voters consider recent performance more than earlier performance.

Research on similar subjects

Tags

Nordhaus, William (author)Political ScienceEconomicsLiberalizationCentral BanksInflationCredible CommitmentEconomic Policy

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