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The Suntory and Toyota International Centres for Economics and Related Disciplines

Political Cycles and the Macroeconomy by Alberto Alesina; Nouriel Roubini; Gerald D. Cohen
Review by: Philip R. Lane
Economica, New Series, Vol. 66, No. 261 (Feb., 1999), pp. 151-152
Published by: Wiley on behalf of The London School of Economics and Political Science and The
Suntory and Toyota International Centres for Economics and Related Disciplines

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Again. In Chapter 8 it is shown that a partisan political system provides an additional incentive to establish an independent central bank. and political cycle theories are relevant in understanding macroeconomic performance across the OECD. provides a theoretical and empirical exploration of the relationship between political cycles and macroeconomic performance. Moreover. A brief introduction outlines the authors' motivation and provides an overview of the book's inain contributions. On the other hand.118. consistent with the presence of sticky wages or prices. In addition.148. Mass. Such delegation depoliticizes monetary policy and hence eliminates partisan cycles in inflation and interest rates. with a time-series study of the US data. They find support for the rational partisan theory: Democratic administrations are more expansionary than Republican ones. MIT Press. Building on Cohen's doctoral dissertation. COHEN.226 on Thu. The empirical analysis is extended to a panel of industrial countries in Chapters 6 and 7. The core finding is that. Having completed the investigation of the direct empirical predictions of opportunistic and partisan models. The authors test for political cycle effects both in macroeconomic outcomes (growth and inflation) and in policy instruments (monetary and fiscal policy). the traditional (1970s) version is first laid out before turning to contemporary rational expectations variations. the United States is not exceptional. xii + 302 pp. 151-4 Book Reviews ALESINAandNOURIELROUBINI. in broad terms.Econornica(1999) 66. In each case. post-electoral partisan effects on macroeconomic performance are stronger. Again. These chapters both provide a useful theoretical framework for the subsequent empirical analysis and stand alone as a textbook treatment that will prove useful to researchers and students alike. In addition to discussing how institutional features affect fiscal outcomes ? The London School of Economics and Political Science 1999 This content downloaded from 152. the approach is encompassing in the sense of investigating both opportunistic and partisan theories on a common. As such. Moreover. but these effects are concentrated in the first half of the electoral cycle. Chapter 5 investigates the impact of electoral uncertainty on macroeconomic performance. the results for the industrial country panel are very similar to those for the United States. it may also insulate the economy policy from opportunistic political cycles since the government is no longer able to directly manipulate monetary policy during election years. Political Cycles and the Macroeconomy. This topic has been the subject of much research over the last decade. 1998. The empirical work begins in Chapter 4. the rational partisan approach is supported in that expected inflation (as reflected in forward interest rates) rises. the authors next consider potential interactions between political cycle theories and some institutional features that have been emphasized in the recent political economy literature. in contrast to the working hypothesis of the 'American politics' branch of political science. the more probable is Democratic electoral success.95. This book by two leaders in the field. there is no evidence in favour of the prediction of the opportunistic theory that we should observe macroeconomic expansions prior to elections. Cambridge. there is clear evidence that partisan cycles are larger in two-party than in multi-party systems. and the authors provide a valuable service in presenting a unified treatment of the main contributions in this burgeoning literature. The interaction between political cycles and the budgetary process is examined in Chapter 9. Paperback ?16. Relative to previous work. the more unexpected is the election outcome. updated data-set. By ALBERTO with GERALD D. an index of electoral uncertainty is extracted from polling date through application of option pricing techniques. Chapters 2 and 3 present a consolidated account of the canonical political cycle theories: the opportunistic and partisan models. 6 Nov 2014 05:17:13 AM All use subject to JSTOR Terms and Conditions . However. the book is more than just a survey and presents many new results. the authors move beyond previous work by constructing a broader and deeper database and conducting a comprehensive set of tests.

especially one founded.partisan conflicts regarding the unernployment-inflation trade-off. the stigma would be less under a broadly applicable wage subsidy. they flow mainly from higher. The externality argument is unconvincing: One might instead argue that. hierarchial and transparent fiscal procedures arguably induce more fiscal discipline than collegial and opaque systems). In many lower-skilled. Finally.g.50. x + 198 pp. More broadly. LANE RewavrdingWork: How to Restore Participation and Self-Support to Free Enterprise. but are better able to respond to shocks. Admittedly. as Phelps beautifully argues in the Epilogue. This foreigner might be excused for observing that the same comment applies to the United Kingdom. disappearing for workers earning more than $12 per hour (roughly the average wage). the authors signal the many issues requiring future research. This alternative underlies recent theories of endogenous growth. and conditioning the macroeconomic transmission of political cycles on characteristics such as a country's degree of openness to trade in goods and capital. not merely on rugged individualism. The authors predict that central bank independence and international monetary and financial integration will attenuate. Among the extensions that would be desirable are the inclusion of developing countries in the empirical analysis. and the book is a potential goldmine for graduate students trawling for dissertation topics in this area. The premier labour market problem in the United States in the past twenty years has been the rising inequality of wages. but it would hardly disappear and would still reduce employers' responsiveness to the subsidy. The present short volume argues for a graduated wage subsidy applicable to the employment of low-wage workers as a solution to this difficulty. on notions of fellow-feeling and comity. Overall. This excellent book is a must-have for all economists and political scientists interested in the interaction between politics and macroeconomics and is also suitable as a textbook for course modules in this area. However. but not elimiinate. Those who have thought about and studied employment tax credits have pointed out and even (Burtless 1985) measured the impact of the stigma that eligibility for such credits may attach to the subsidized employee. Harvard University Press. the pressing need for fiscal consolidation in many countries will likely lead to intense partisan and distributional conflicts over the precise design of fiscal adjustment programmes. In the United States the subsidy would kick in at $4 (slightly below the federal minimum wage at the time the book was written) and phase out gradually. It militates against subsidizing the low-skilled to internalize externalities. 1997.118. PHELPS. to the extent that there are externalities among workers. the author never addresses the likely impact of the subsidy on low-skilled employment-would it really ? The London School of Economics and Political Science 1999 This content downloaded from 152. this is an extremely frustrating and annoying book. increased productivity of higher-skilled workers (as the employment of low-skilled workers rises). 6 Nov 2014 05:17:13 AM All use subject to JSTOR Terms and Conditions . S. ?16. (2) A rich country. with the latter more rapidly accumulating larger amounts of debt in response to adverse shocks.226 on Thu. this volume is a fine achievement. (1) Unemployment and low returns to work among unskilled workers create a variety of negative externalities. Cambridge.152 ECONOMICA [FEBRUARY (e. This suggests a trade-off in the design of political systems: two-party systems may generate larger partisan cycles. Mass. and instead perhaps justifies subsidizing education and training. By E. The author's justifications for this subsidy are as follows. should be ashamed of such inequality.148. Throughout the book. and reduced burdens of social problems. such as increased crime and intergenerational spillovers. (3) The net costs of such a subsidy are small or zero once one accounts for reductions in transfer programmes. The authors write with appealing clarity and successfully convey a sense of intellectual excitement about this field of research. Trinity College Dublin and CEPR PHILIPR. Chapter 10 recapitulates the book's main findings and speculates as to the relevance of political cycles to future macroeconomic performance. the authors present evidence that two-party systems adjust more quickly to fiscal shocks than multi-party coalition systems.