Date Added: Sep 2010
Studies of OECD countries have generally failed to detect real economic expansions in the pre-election period, casting doubt on the existence of opportunistic political business cycles. The authors develop a theory that predicts a substantial portion of the economy experiences a real decline in the pre-election period. Specifically, the political uncertainty created by elections induces private actors to postpone investments with high costs of reversal. The resulting declines, referred to as reverse electoral business cycles, are larger the more competitive the electoral race and the greater the polarization between major parties. They test these predictions using quarterly data on private fixed investment in ten OECD countries between 1975 and 2006.