[1]: 
; (1.1.1)
where yt is the rate of output growth, 
is the natural rate of output, pt is the inflation rate, 
is the expected rate of inflation, and g is a positive
parameter. Equation (1.1.1) simply says
that policy-makers can “buy” output growth, yt, by increasing the
inflation rate, pt, provided values of
inflation expectations and the natural rate growth of output.
A 1.1.2 Inflation
expectations are adaptive.
The traditional opportunistic
model assumes that expected inflation is determined by past values of
inflation:
; 0<l<1 (1.1.2)
where l captures today’s reaction to
past periods’ mistakes in forecasting inflation. Small values of l imply that expected
inflation in period t are almost
identical to past inflation regardless of past mistakes in forecasting; that
is, the effect on expectations of the second term in equation (1.1.2) on the
right-hand side is almost nil in this case.
Using equations (1.1.2) and
(1.1.1) one gets the expectations-augmented Phillips curve under the adaptive
expectations assumption:
(1.1.3)
Equation
(1.1.3) is one of the main features of the model which states that the
policy-maker can achieve and maintain a desired level of output growth by
choosing the appropriate level of inflation pt.
A 1.1.3 Politicians are identical and they prefer to
stay in office.
This assumption entails that the incumbent and the
challenger are rational individuals who only seek to maximise
their probability of re-election. He
defines this aggregate measure simply as the sum of all voters preferences
since these are assumed to be identical.
Provided that the incumbent knows the electorate’s preferences, and that
both the electorate and politicians have similar objective functions, she maximises an aggregate voting function subject to equation
(1.1.3):
; 0<b<1 (1.1.4)
where b is the electorates’ discount factor.[2] Note that the problem here is to determine an
inflation plan p* that maximises
equation (1.1.4); that is, choose a level of inflation to attain the desired
level of output growth at the time of the election so as to maximise
aggregate voting.
A 1.1.4 (i) There are two
candidates: an incumbent and a challenger.
(ii) Party affiliations are ignored.
A 1.1.5 (i) Voters dislike
unemployment and inflation. (ii) They
vote for the incumbent if the economy is doing well: voters are retrospective.
(iii) Voters are myopic, they heavily discount the future.(iv) Voters are also
assumed to have identical preferences.
The key feature of assumption 1.1.5 is that voters are
myopic. Voters are myopic in the sense
that they consider the economy’s present performance and that is why they
heavily discount the future.
A 1.1.6 The
policy-maker controls a monetary policy instrument.
A 1.1.7 The
timing of the election is exogenously given.
1.1.1 The
Model at Work
p
C
B B
(a) (b)
Figure 1.1.1
Source: Adapted from Alesina et al. (1997)
Consider
a two-period economy, namely t + 1
and t+2. In addition, consider a long-run and a
short-run Phillips curve (henceforth, LRPC and SRPC respectively). Consider the LRPC for the case in which 
, and the SRPC for the
case when 
. In other words,
visualise a vertical LRPC and a positively sloped SRPC in (y,p)
space. Events unfold as follows.
Initially, consider point A in which both the SRPC and the LRPC cross
i.e. 
. Let the end of
period t + 1 be the election
period. At t+1, the incumbent manipulates policy instruments which increases
aggregate demand from AD to AD* up to point B (see figure 1.1.1.a). Notice that at point B inflation is greater
than in A so growth is above its natural rate i.e. 
. Thus, just before
the election growth is above normal and inflation is rising moderately (Alesina
et al. 1997). Now, suppose that the incumbent is
re-elected. At period t+2 inflation expectations begin to increase
because of the expectations error at t+1
i.e. the incumbent’s sudden manipulation of the economy caused voters to
wrongly estimate expectations, 
(see figure
1.1.1.b). If the re-elected incumbent
does not expand aggregate demand even further, demand will move along AD* up to
point C in which case inflation is consistently higher than before the
election. In this model the government
can bring inflation down by implementing contractionary
aggregate demand policies. However, Nordhaus (1975) shows that this contractionary
aggregate demand policies can only bring the economy back to point A* and not
A, where A*>A (i.e. inflation on A* is higher than on A). Thus, inflation remains higher after the
incumbent is re-elected.
The
model has two important results: (i) one should
observe an increase in growth and a moderate increase in inflation before the
election period, and (ii) there should be a permanent increase in inflation
after the election period even with contractionary
aggregate demand policies. This type of
cycle clearly yields sub-optimal outcomes in that inflation is permanently
increased without any real gains in output growth.
Three
major drawbacks should be noted. First,
voters are irrational in how they
form inflation expectations and the way they evaluate candidates’
competence. A voter who has lived for
more than two election periods should be able to learn and know that the
incumbent is likely to behave opportunistically. Thus, the voter should punish the incumbent
and reward the challenger in the next election period.
Second,
the model assumes that the incumbent controls a monetary policy instrument
since she manipulates inflation.
However, the assumption is rather troublesome given the degree of
central bank independence in industrialised economies. Moreover, central bank independence is
regarded as a key factor to control inflation.
Finally,
fiscal policies are not considered in the analysis even though empirical
evidence suggests that transfers have played an important role in pre-electoral
policy-making (Alesina et al. 1997; Dranzen 2000). Later
theoretical endeavours such as those by Rogoff (1990)
and Cukierman & Meltzer (1986) address this point
by considering a government budget instead of a Phillips curve in the
theoretical framework.
In
the next section we look at the rational expectations opportunistic model,
which addresses these elements by assuming that voters’ expectations are formed
rationally.
1.2 The Rational Opportunistic Model
To look at the rational
opportunistic model we consider its deviations from the assumptions of the
traditional opportunistic model spelled out in section 1.1. Here we focus on
the rational opportunistic model presented in Persson
& Tabellini (1990) because it follows a
Phillips-curve-type framework similar to that of section 1.1.[3]
Rational opportunistic models
include rational behaviour into the analysis in two dimensions: (i) voting is not retrospective but forward-looking, and
(ii) inflation expectations are rational i.e. they do not depend only on past
information of inflation, but on the information available at the time of the
election. In a nutshell, rational
opportunistic models differ from its non-rational counterpart in assumptions A
1.1.1, A 1.1.2, A 1.1.3, A 1.1.5, and A1.1.6.
Persson
& Tabellini (1990) try to explain PBC’s by incorporating rational behaviour and by adding a
competence factor between candidates in the analysis. The competence term coupled with information
asymmetries account for how efficiently different governments handle the
economy. These factors create
uncertainty in election outcomes which in turn generate the cycle.
(A l.1.1)*
The Phillips curve includes a
competence term
(1.2.1)
where
et
is a competence term. This term can be
interpreted as the government’s ability to manage the economy efficiently e.g.
how the incumbent deals with supply shocks.
The competence term follows an MA(1) process:
E(ft)=0 " t =
1,2 (1.2.2)
where
f
is a random variable which reflects the incumbent’s competence. Equation (1.2.2) simply says that competence
is random and persistent over time. The
government’s competence is random because it depends on the nature of the problems
it faces. On the other hand, it is persistence because it is assumed that if a
particular policy-maker successfully solves a problem today she is likely to
solve the same problem tomorrow. Equation (1.2.2) is very important in that it
resembles voters’ informed guesses when choosing a candidate. The unconditional expectation operator
reflects the fact that voters do not know candidates’ competence for certain
i.e. ft’s
values are not known before the election.
(A l.1.2)*
Inflation expectations are
rational
; (1.2.3)
where
It-1 is the
voters’ information set at the end of period t-1. But what information is included in It-1
? The competence term is the key
variable here: voters can only assume
competence values, ft and ft-1. Persson & Tabellini (1990) impose a series of timing assumptions in
which the voters’ information set is more clearly presented. Section 1.2.1 explains the role of the
competence term and the timing assumptions.
Assumption (A1.1.2)* is important in
that the combination of rational expectations and timing assumptions are
crucial in the determination of the political business cycle.
(A
1.1.5)* Voters elect the candidate who
maximises their expected utility. Voters are also assumed to have identical
preferences.
Contrary
to its counterpart, rational opportunistic models do not consider a myopic
electorate. Here the electorate is
forward-looking.
(A 1.1.6)*
Policy-makers control inflation
directly.
1.2.1 The
Model at Work
Consider
two periods: t and t+1. Events unfold as
follows. At he beginning of period t: (i) the incumbent knows ft
, (ii) inflation is set, and (iii) everybody observes output growth. Next, at t+1 elections take place but policy
and candidates’ competence, et
,
are known by the electorate with one period lag; that is, at period t
they observe pt
and ft-1
but not ft. Note that if voters could observe actual
inflation at the time of the election along with growth and expected inflation,
they could calculate competence by solving for et
in equation (1.2.1). Under this timing
assumptions output growth can signal the incumbent’s competence. Thus, the incumbent has an incentive to set
inflation high for the electorate to observe a high employment level and a high
value of competence ft. At t+1 the incumbent is re-elected and the
economy exhibits an output growth above its natural rate.
The
model yields two important results.
First, if the policy-maker is competent she will generate a political
business cycle. Because competence is observed with one period lag the
incumbent has the incentive to stimulate growth so as to be regarded by the
electorate as a competent candidate. Second, the model implies that competent
candidates are always re-appointed. It
is rational for the electorate to look at the state of the economy in the
election period because it signals the policy-maker’s competence. This result follows from the persistence of
the competence term et
: a competent candidate today is likely to
be competent tomorrow (see equation 1.2.2).
Without this feature voters would not have an incentive to vote for the
incumbent during high levels of growth observed in election periods.
One
of the model’s shortcomings is how events unfold. These are conveniently set in order to obtain
a cycle. These timing assumptions may
not seem plausible, but the authors justify themselves by arguing that
policy-makers do control inflation directly.[4]
The timing assumptions make it
more difficult for the voters to observe inflation because no monetary
signalling is being used. They argue
that growth (or unemployment) is more readily observable than inflation.
To
summarise, the competence model by Persson & Tabellini generates short-lived cycles based on information
asymmetries caused by timing assumptions.
The cycle exhibits a pre-electoral boom not followed by a recession
afterwards contrary to its traditional counterpart.
1.3
The
Rational Expectations and Traditional Opportunistic Models in Perspective
As
noted before there are some differences between models. Rational expectations
allow for the voters to use all available information when forming expectations
and to exhibit a forward-looking behaviour. In rational models cycles are
generated by information asymmetries, whereas in the traditional framework
cycles are solely created by the opportunistic behaviour of the incumbent to
stimulate the economy in order to get re-elected.
There
are several implications when including rational expectations. The rational expectations assumption does not
allow the incumbent to easily manipulate the economy because she has to be
perceived by the electorate as a competent candidate. If on the other hand inflation expectations
are adaptive the policy-maker can freely manipulate and maintain output growth
by setting current inflation since expectations and the natural rate of growth
are known (equation 1.1.4).
As
for traditional models, voters are assumed to only take into account the
economy’s state at the election period i.e. a myopic electorate. In traditional models the incumbent
manipulates the economy before elections take place for the electorate to think
that the economy is healthy (she behaves in this fashion because voters are
myopic). In rational models, however,
voters are not myopic but the incumbent still manipulates the economy so as to
be perceived as a competent candidate.
Thus, whether voters are myopic or not does not stop the incumbent from
manipulating output growth. The
assumption, however, changes the individual voter’s problem. In rational models voters maximise expected
utility and in the traditional framework they maximise their utility at the
time of the election. Thus, rationality
changes voters’ behaviour in terms of how they perceive the economy’s
performance i.e. rationality allows the electorate to consider future economic
performance.
Rational
opportunistic models show one intriguing feature: one finds that competent
candidates are the ones to take advantage of the opportunistic behaviour to get
re-elected. This behaviour, however,
does not resemble a competent candidate in that she does not show any
capability in terms of managing the economy efficiently. In fact, an opportunistic behaviour yields
inflation levels above expectations. This result comes from the model’s set-up and
it can be regarded as counter intuitive since in reality one would expect a
competent policy-maker not to behave opportunistically, but to win the election
she has to take advantage of the stimulus she can exert to the economy.
Another
drawback of rational models is that they rely on timing assumptions to obtain
information asymmetries among players which in turn creates a cycle. Timing assumptions are somewhat troublesome
in that they are arbitrarily set, and without them the model’s result might not
hold.
To
summarise, we have looked at the first attempts to explain macroeconomic
fluctuations caused by the political system.
The pioneer works by Nordhaus (1975) and Persson & Tabellini (1990)
try to explain these fluctuations in a non-rational and rational framework.
Each model exhibits particular features. Rational models consider a rationally
formed inflation expectations framework and a forward-looking electorate, which
generate cycles because of information asymmetries caused by timing
assumptions. On the other hand,
traditional models consider adaptive expectations and retrospective behaviour,
which create cycles entirely because of the opportunistic behaviour of the
incumbent.
3. The Partisan Political Business Cycle
This theoretical endeavour was
pioneered by Hibbs (1977) and further developed by
Alesina (1987, 1988a, 1988b) who proposed a rational expectations
framework. Different from the
opportunistic models, partisan models assume a two-party political system in
which each party has a different policy platform: the right-wing party fights
inflation and the left-wing party is more concerned about unemployment and
growth. Fluctuations in the economy are
induced by partisan preferences i.e. how each policy moves along the Phillips
curve. They also differ in that the key
actors are no longer political candidates but the electorate: each voter elects
the candidate who better suits her preferences according to party platforms.
Similar to the opportunistic model, partisan models use a basic three-equation
framework: (i) candidates’ objective functions, (ii)
the economy is described by an augmented-expectations Phillips curve, and (iii)
inflation expectations are either adaptive or rational.
3.1 The Traditional Partisan Model
Hibbs (1977) suggested that
macroeconomic fluctuations are induced by partisan preferences. Even though his work is mostly empirical, it
can be adapted to the basic three-equation framework.
He
considers two parties, namely L and R.
Party L fights unemployment and party R is more concerned about
inflation. Thus, if party L wins the
election one should see a decrease in unemployment (increase in inflation)
throughout the party’s period in office.
Instead, if party R wins there should be a decrease in inflation
(increase in unemployment).
Following our analytical
format, Hibbs partisan model substitutes assumptions
1.1.2, 1.1.3 and 1.1.5 for assumptions (1.1.2)*, (1.1.3)* and (1.1.5)**
respectively.
A (1.1.3)* Politicians are not identical and they prefer to stay in office. There is a left-wing and a right-wing party:
the former fights unemployment and the latter inflation.
The following inequalities summarise each party’s preferences:
uL £
where strict inequalities
are necessary but not sufficient conditions to yield a cycle[5];
that is, parties may converge towards the middle in order to win (the median
voter theorem applies). Thus, as long as
electoral results are uncertain differences in party preferences generate a
cycle.
Each party has an inflation target which signals its
policy platform. Hence, parties win
votes depending on the degree of similarity between parties and voters’
preferences.
A
(1.1.5)** Voters have different
preferences over inflation and unemployment.
They choose the left- or right-wing
party which better suit their preferences.
3.1.1 Hibbs’ Model Critiques
Hibbs non-rational framework
has similar critiques as those made to Nordhaus’ model: non-rationality incorporates backward-looking
voting behaviour and adaptive inflation
expectations. The implications of both
assumptions were discussed in section two.
Secondly, Hibbs model does not identifies
whether parties use monetary or fiscal instruments to hit their targets
although a monetary instrument is more likely given that he analyses
unemployment-inflation trade-offs (Dranzen 2000: 12).
3.2 The Rational Partisan Business Cycle
Alesina (1987) builds on Hibbs’
work by incorporating a rational expectations framework. In a nutshell, Alesina’s model differs from its traditional partisan
counterpart in that election’s outcomes are uncertain, and, of course, in that
voters form inflation expectations rationally. Let us now look at these
differences.
A.3.2.2 Inflation expectations are formed rationally.
As in the opportunistic
rational expectations model, voters are assumed to form inflation expectations using all available information at the
period before the election. See equation (1.2.5) in (A1.2.1)*.
A 3.2.3 Politicians have
different preferences. The left-wing party fights inflation and the right-wing
party is more concerned about unemployment and growth.
Consider two political parties. Party L is more concerned about unemployment
and growth, and party R is concerned about fighting inflation. Alesina defines both parties’ preferences
as:
; 
(3.2.2)
; 
(3.2.3)
where subscripts denote
party L and R respectively. Notice that
the terms 
and
are each party’s
target rate of inflation in their policy platforms, and each one captures each
party’s preferences. Also note that these target rates are strictly positive
since economic theory suggests the optimal level of inflation is not zero.[6] The terms bR and bL
capture the benefits to each party from output growth.
Each party’s relative
preferences are captured by the relationship between these terms: 
and 
. The first inequality
says that party L is more willing to use inflation to fight unemployment than
party R; and the second inequality implies that party L is relatively more
concerned about growth than party R. It
is important to stress out the fact that this does not mean that party R
dislikes growth, but that party L is relatively
more concerned about growth. In
short, party L is more willing to fight unemployment at the cost of higher
inflation, and party R is focused on fighting inflation at the cost of lower
growth.
A.3.2.5 Voters have different preferences over the inflation-unemployment
trade-off, and based on those preferences they choose the candidate that
delivers the highest expected utility: they exhibit a forward-looking voting behaviour.
Individual preferences are a function of
output growth and the inflation rate:
; bi >0,
>0 (3.2.4)
where is the ith individual
target level of inflation, and bi
is the benefit from output growth. The
target inflation level is what allows for
different preferences among voters. Notice
that parties and individuals have similar objective functions, what
distinguishes them from one another is their respective inflation targets.
Clearly an individual voter will cast her vote for party
R if she prefers low inflation levels, and for party L if she is more concerned
about being unemployed. These
preferences are captured by the terms 
and 
. For instance, a
voter with a “high” bi and
would vote for party L.
3.3 The Model
at Work: A General Version
As before the economy is
described by an expectations-augmented Phillips curve.
(3.3.1)
where
wt is the rate of growth
of nominal wages. The fact that wages
are nominal implies that these are not indexed to inflation. Hence, labour unions will try to set wages so
as to compensate for any changes in inflation.
Wages
are set at the beginning of the period, where a period can be thought of as two
years. Thus, unions set wages equal to inflation expectations:
(3.3.2)
where
is the inflation rate expected at the beginning of period t.[7] Thus, it follows from equations (3.3.1) and
(3.3.2) that output is now a function of current and expected inflation:
(3.3.3)
Note
that equation (3.3.3) is identical to equation (1.1.1) in section 1.1. As
before this equation represents the supply side of the economy. A demand side is not explicitly modelled
because the model assumes that policy-makers directly set the inflation rate.[8]
As before, consider two political
parties: L and R where the former fights unemployment and the latter combats
inflation. Events unfold as follows. At
the beginning of the period unions set nominal wages equal to expected
inflation (equation 3.3.2). After
expectations are formed, the policy-maker sets inflation, pt,
taking expectations as given.
Maximising
each party’s objective function with respect to inflation pt,
yields optimal levels of inflation pR*
and pL*
for party R and L respectively:
for 
and 
. (3.3.4)
Notice
that this result is time inconsistent: each party promises a certain level of
inflation in their policy platforms, but delivers a different level of
inflation. The difference between both
inflation levels (inflation or deflation bias) is captured by the term
for k = R,
L.
To understand this result, consider party L
for a moment. In its policy platform the party commits to an inflation level 
which is its target inflation level with a corresponding
output growth y = . In office she is
tempted to break her promise by increasing the inflation level to pL*
which makes output increase above its natural rate to y¢
= +. Clearly this
situation brings the economy to a higher inflation and output levels since pL*
>and y¢
> y. The inconsistency comes from the fact that
the policy-maker, when in office, does not commit to the party’s policy
platform. But why would the policy-maker
have an incentive to cheat to the public?
For one reason, the time consistent solution yields a lower utility
level than the time inconsistent solution. This can be readily seen by
substituting the time consistent and the time inconsistent output levels into
each party’s utility function:
,
where
c and f superscripts denote the time consistent and inconsistent (fooling)
solutions respectively. Clearly party L has an incentive to cheat since u c(y) < uf(y¢).
Analogous
to party L, Alesina obtains similar results for party R, which differs from
party’s L only because of the value of bR.
Optimal
policy rules have the following relationship: pR*
< pL*
i.e. inflation is higher when party L is in office. This result follows from the characteristics
of each party’s preferences. Party L is
more concerned about growth and unemployment (bL>bR>0)
and less concerned about fighting inflation than party R (
). Thus, party L has a
higher incentive to cheat or create unexpected inflation resulting thus in
higher equilibrium levels of inflation.
3.4 The Model at Work: Uncertainty in Election
Outcomes
Using the results from section 3.3,
this section, accounts for uncertainty in election outcomes. Consider periods one and two: an election and
a non-election period respectively.
Also, let P be party L’s probability of winning office, and 1-P party
R’s probability; where P is the probability of obtaining more than 50 percent
of the votes. Voters know each party’s
objective function so they form period’s one inflation expectations based on
each parties probability of election and their respective optimal inflation
levels:
(3.4.1)
Obviously, there are two possible
election outcomes. Table 3.4.1 has period’s 1 economic outcomes for either
election outcome.
Table 3.4.1
Elected Party: L R
Inflation 
Output 
Results are obtained by substituting equation
(3.4.1) into equation (3.3.3) and setting pt equal to the
winning party’s optimal inflation level.
Because of the elections uncertainty,
inflation expectations are wrongly estimated in the first period (equation
3.4.1). However, in the second period,
with no election uncertainty, expectations are correctly estimated and they
therefore begin to adjust to the real inflation rate set by the winning
party. Thus, 
if party L wins, 
if party R wins, and
output growth is equal to its natural rate with either party in office (y2=).
Hence,
with certainty there is no cycle since y2
=, and under uncertainty the cycle is generated by having
inflation above expectations, and consequently output is above its natural rate
of growth (y1 > ).
Notice
that output fluctuations also depend upon the degree of political polarisation
i.e. how different are policy platforms and 
. Hence the following
result: political polarisation creates wider economic fluctuations (Alesina
& Rosenthal 1995:176). In addition, the degree of a positive inflation
shock influences the degree of the cycle: if party R wins inflation shocks
should be lower than if party L wins because the shock is less expected given
the party’s policy platform.
To
summarise, if party L wins inflation increases above expectations and output
grows above its natural level. If, on
the other hand, party R wins inflation is below expectations and output is
below its natural rate. In the second
period output returns to its natural level regardless of the party in office
because of the wage (inflation expectations) adjustment in the economy.
3.5
The Rational and the Traditional Partisan
Models in Perspective
In
Hibbs and Alesina’s models
parties' preferences are similar. Hibbs’ model assumes adaptive inflation expectations and backward-looking
behaviour. Adaptive expectations allow the incumbent to increase and sustain
high levels of inflation during her entire period in office. Moreover, adaptive expectations imply that
expectations take time to adjust and the model therefore yields long-lived
cycles. On the contrary, rational
partisan models assume that formation of inflation expectations are rational
and voting behaviour is forward-looking. In rational models expectations adjust
immediately after wage contracts are renewed yielding thus short-lived
cycles. Both models generate a
cycle: rational models because of the
uncertainty of election outcomes, and traditional partisan models because of
different party preferences.
Two
questions are important when assessing the rational-partisan model. First, is the wage-contract assumption which
allows labour unions to adjust for inflation variations after the election
period plausible? As in the rational
opportunistic model, timing assumptions allow for inflation surprises even under
rational expectations; a change in the timing assumption would remove the
model’s capability of generating a cycle (Dranzen
2000: 15). The second problem is about
election periods. These reasons are the
driving force of the model that generate cycles and yet they are exogenously
determined. Thus, a better
microstructure is necessary to endogenise such
determinant factors.
4. Overview
Compared
to opportunistic models, rational models explain macroeconomic fluctuations caused
by the political system in a more realistic fashion since they assume
rationality in their models. The
advantage of rationality is that it allows voters to have a forward-looking
behaviour and to use all available information when forming inflation
expectations.
Aside
from the rationality assumption, rational models have two common features: (i) they rely on timing assumptions to obtain fluctuations
in the economy, and (ii) cycle effects are short-lived. In partisan-rational models cycles occur because
of the uncertainty in election outcomes, and the sluggishness of wages. In the opportunistic-rational model cycles
are generated by information asymmetries caused by the timing assumptions. One
of the shortcomings of these models is that they take these driving forces as
exogenous.
As
for the traditional models, they also show two common features: (i) they do not assume rationality, and (ii) cycles are
long-lived. The first feature implies a
naïve electorate that does not punish the incumbent if she consistently tries
to manipulate the economy, and a backward-looking behaviour. Feature (ii) comes
directly from the adaptive expectations structure since they imply that any
incumbent is able to manipulate and maintain high levels of inflation.
A
common feature among all the models is that they try to explain cycles through
an inflation-unemployment trade-off. The
use of the Phillips curve implies an incumbent’s manipulation of the economy
via monetary policy even though empirical evidence on the
In terms of the political
structure, all models assume a presidential although Alesina & Rosenthal
(1995) considers a legislative-executive political system in which legislative
and executive elections are held. This
model tries to describe how a divided government influences PBC’s,
but it disregards party coalitions in multi-party systems. The analysis also neglects interest groups
and how they can lobby for the implementation of a particular policy. Another line of research would be to mix partisan
and opportunistic features in a single model to account for opportunistically
behaved parties in the political system (Alesina 1995: 159).
As for the empirics of PBCs, further research is needed as the evidence in this
area is ambiguous. Furthermore, evidence
of PBC in
Notes
[1] Nordhaus uses a different but equivalent description
of the Phillips curve; where inflation is a function of unemployment and
expected inflation.
2 In equation (1.1.4) the discount factor b assumes a value close to 1 in order to characterise
voters’ myopia (i.e. A 1.1.5). As the election period gets closer, voters put a
higher weight on economic performance.
3 The works by Rogoff (1990) and Cukierman &
Meltzer (1986) also build a rational opportunistic model by considering a
government budget instead of a Phillips curve i.e. they assume an incumbent
manipulating a fiscal rather than a monetary instrument.
4
Assumption (A 1.1.6)*.
5
Dranzen (2000: 12)
6
See Alesina & Rosenthal 1995 for a discussion on this point.
7 
is formed rationally
by assumption A.3.2.2.
8 The point of whether the incumbent directly
manipulates a policy instrument is taken into account by Persson and Tabellini
(1990) as we saw in section two.
However, most of the models do not delve into such details when setting
up their frameworks. See footnote 3 in Alesina & Rosenthal (1995: 167).
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