Activist Macroeconomic Policy, Election Effects and the Formation of Expectations: Evidence from OECD Economies

In: Economics & politics, Volume 12, Issue 2, p. 137-154

Abstract

We examine the explanatory power of a political—business cycle theory in which governments practice short‐run policy to lessen the impact of exogenous shocks. Governments have ideological objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. The most prominent version, the rational partisan model, incorporates forward‐looking expectations. This model can be compared to a competing model based on backward‐looking expectations. Alesina and Roubini's recent advocacy of the rational model uses OECD data. Our reconsideration of the same data, updated to 1995, suggests that the adaptive expectations version offers a better explanation than the rational one.