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In many developing countries, we often see what are called "political business cycles". This is ...

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In many developing countries, we often see what are called "political business cycles". This is ...

In many developing countries, we often see what are called "political business cycles". This is when there is a large (usually unsustainable) expansion right before an election and then a dramatic contraction afterwards. Why might this be the case?

▸ The government tries to tame inflation in the run up to the election and so implements policy that temporarily shifts the labor demand curve to the left which reverses afterwards.

▸ Right before the election, workers choose not to work in order to vote, temporarily shifting the labor supply curve to the left, reducing the wage level which reverses afterwards.

▸ In order to gain more votes, the government might overspend even if the country is at full employment temporarily shifting the labor demand curve to the right creating inflation which reverses afterwards.

▸ Around elections, opposition parties try to sabotage the government and prevent expansionary legislation causing a recession which reverses afterwards.

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Macroeconomics

Edition: 3^rd

Authors: Acemoglu, Laibson, List

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