Politics Policy - 2021 - Pulatov - Political Business Cycles in Post Communist European Countries PDF

Political Business Cycles in Post-Communist
European Countries
ABDULLO PULATOV
Westminster International University
AHMAD HASSAN AHMAD
Loughborough University
This article analyses political business cycles (PBCs) in ten former

European communist countries. The dataset used covers the period
1990-2018. The results show that the PBCs manifest themselves in these
countries through both fiscal and monetary policy. Changes in government
expenditure during election times are found to be significant in reducing
unemployment. Hence, it signals that there is a politically driven fiscal
expansion. The results also show the importance of institutional quality
in reducing the effects of the PBCs. The monetary policy models indicate
that changes in money stock during and around election times affect the
unemployment rate. Undertaking a subsample analysis of the non-EU
and EU members highlights the case that the membership of the EU is
an important factor in preventing the development of PBCs.
Keywords: Political Cycles, Government Expenditure, Fiscal Policy, Economic
Policy, Labor Policy, Monetary Policy, Elections, Political Economy,
Post-Communist Countries.
Related Articles:
Hazakis, Konstantinos J. 2015. “The Political Economy of Economic
Adjustment Programs in the Eurozone: A Detailed Policy Analysis.” Politics
& Policy 43 (6): 822-854. https://doi.org/10.1111/polp.12141
Rogers, Chris. 2009. “The Politics of Economic Policy Making in Britain:
A Re-Assessment of the 1976 IMF Crisis.” Politics & Policy 37 (5): 971-994.
https://doi.org/10.1111/j.1747-1346.2009.00207.x
Sager, Fritz, and Markus Hinterleitner. 2016. “How do Credit Rating
Agencies Rate? An Implementation Perspective on the Assessment of
Austerity Programs during the European Debt Crisis.” Politics & Policy 44
(4): 783-815. https://doi.org/10.1111/polp.12165
Acknowledgements: The authors thank the anonymous referees at Politics & Policy whose
comments helped to improve the final quality of the text.
[Article updated on 29 July 2021 after first online publication: copyright line was corrected.]
Politics & Policy, Volume 49, No. 5 (2021): 1248–1269. 10.1111/polp.12427
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Pulatov / Ahmad / Political Business Cycles | 1249
Ciclos económicos políticos en los países europeos poscomunistas
Este artículo analiza los ciclos económicos políticos en diez antiguos

países comunistas europeos. El conjunto de datos utilizado cubre el
período 1990-2018. Los resultados muestran que el ciclo económico
político (CBP) se manifiesta en estos países a través de la política fiscal
y monetaria. Se encuentra que los cambios en el gasto público durante
la época de elecciones son importantes para reducir el desempleo. Por lo
tanto, indica que hay una expansión fiscal impulsada políticamente. Los
resultados también muestran la importancia de la calidad institucional
para reducir los efectos de los CBP. Los modelos de política monetaria
indican que los cambios en la cantidad de dinero durante y alrededor de
las épocas de elecciones afectan la tasa de desempleo. La realización
de un análisis de submuestra de los países no pertenecientes a la UE y
miembros de la UE destaca el caso de que la pertenencia a la UE es un
factor importante para prevenir el desarrollo de CBP.
Palabras Clave: Ciclos politicos, Gasto público, Política fiscal, Política
económica, Política laboral, Política monetaria, Elecciones y Países
poscomunistas.
後共產主義歐洲國家的政治經濟周期
本文分析了十個前歐洲共產主義國家的政治經濟周期。使用的數據
集涵蓋1990-2018年。結果表明，政治財政週期（PBC）通過財政
和貨幣政策在這些國家中表現出來。人們發現，選舉期間政府支出
的變化對減少失業具有重要意義。因此，這表明存在政治驅動的
財政擴張。結果還顯示了機構質量在減少人民銀行影響方面的重要
性。貨幣政策模型表明，選舉期間及選舉前後貨幣存量的變化會影
響失業率。對非歐盟和歐盟成員國進行的子樣本分析突出表明，歐
盟成員國是防止PBC發展的重要因素。
關鍵字: 政治週期, 政府支出, 財政政策, 經濟政策, 勞工政策, 貨幣政策, 選
關鍵字
舉和後共產主義國家.
Current political decisions, particularly those that affect capital stock

and public infrastructure, influence future prosperity. This is because physical
infrastructure and human investments are contingent on the available resources
bequeathed to future generations. However, public policies are influenced by the
incumbent’s political interests that may constrain them from making optimum
decisions (Chari and Kehoe 2016). Therefore, political decisions might result in
the suboptimal provision of goods and services, mainly because the incumbent
may choose to maximize their own utility rather than the public welfare. Such
decisions are blamed for economic fluctuations in the form of increases in
inflation and unemployment. This view proposes that business cycles might
not only be due to “animal spirits,” as argued by Keynesian economists, but
1250 | Politics & Policy / October 2021
could also be caused by public policy manipulations by the incumbents. This

argument led to the development of the “opportunistic” political business cycle
(PBC) models that portend that incumbent politicians, irrespective of their
party affiliation, would try to manipulate policies to create a favorable economic
environment to maximize their electoral chances (Abrams and Issifov 2006).
The PBC hypothesizes that volatility in economic activity is a consequence
of stimulating policies implemented during the period prior to elections with
the aim of improving the prospects of the incumbent to be reelected (Frankel
2010). Both expansionary monetary and fiscal policies could lead to politically
popular outcomes in terms of a reduction in unemployment or a rise in income.
However, the policies could also be detrimental to the economy in the long run
as they would result in inflation and the deterioration of the country’s external
balances. This is because inflation will make domestic exports more expensive
relative to imports.
Since the work of Nordhaus (1975), a body of both theoretical and empirical
literature has been developed to explain the PBCs, which can be grouped into
two theories: opportunistic and partisan. The former presents the economy as
characterized by the Philips Curve where there is a trade-off between inflation and
unemployment. Politicians who are seeking reelection are more concerned with
unemployment than inflation and, therefore, would support an expansionary
fiscal and/or monetary policy to reduce unemployment. However, it is argued
that the executive arms of the government do not control monetary policy in
countries that have independent central banks. Nominally, independent or
subservient central banks accommodate the executives’ pressures for favorable
monetary policy during election periods (see e.g., Woolley 1984). Another
related debate is on the voters’ sophistication in the way they form expectations
on inflation and how they assess the government’s performance. The partisan
PBCs are economic fluctuations during elections as a result of the differences
underpinning the political parties (Drazen 2000).
The role of institutions in PBCs has been highlighted in the literature. It is
argued that incumbent politicians in countries with strong institutions would
find it difficult to use public policies for their political advantage as opposed to
countries with weaker institutions. This is the finding of Baskaran and others
(2016) for a panel of Israeli municipalities. Rose (2006) has also demonstrated
how the presence of fiscal rules helps in preventing the incumbent from
electorally induced policy manipulation. However, there is a counterargument
that institutional arrangements alone could not deter the incumbent from policy
manipulation for their own political gains. For example, Telatar (2003) shows
that PBCs do exist even in countries with strong institutions. This is supported
by Abrams and Iossifov (2006), who argue that the U.S. Federal Reserve Bank
(the Fed) plays a role in the development of PBCs, but only during the periods
under which the incumbent politicians are the ones that have appointed the Fed
Chair. It is, therefore, clear that the role of institutions in the PBCs is still open
to debate and this is the area in which this article contributes.
The aim of this study is to investigate the PBCs in ten former European
communist countries that adopted democracy after the fall of communism in
the early 1990s. The dataset spans from 1990 to 2018, which provides enough
opportunity for this analysis. PBCs have been extensively documented in the
extant literature, particularly in the advanced democratic countries of Western
Europe and North America. However, the focus of this article is countries that
moved from communism to democracy and have not experienced wide-scale
civil or other forms of violent conflicts. Consequently, the countries included
in this analysis are the Czech Republic, Bulgaria, Estonia, Hungary, Latvia,
Lithuania, Poland, Slovakia, Romania, and Albania.
These post-socialist European countries are different from other developing
and emerging economies as they were under a different set of political and
economic systems until the collapse of the Soviet Union in the 1990s. This has
fundamentally changed not only the political landscape, but also the economic
structures of the countries, both domestically and in their international
economic and political relationships. Several of them have forged a strong
relationship with the EU and others have even joined the union and become full
members (Lane 2010). The countries selected for this study are based on three
criteria: (1) although the countries have adopted the democratic principles of
governance, they are all emerging economies that are susceptible to PBCs due to
a lack of strong institutions that can check extra-constitutional powers (Frankel
2010); (2) the countries are the neighbors of Western economies where strong
institutions exist, where some of the countries analyzed have already joined the
EU and others are aspiring to join; and (3) the availability of the data as the
analysis uses secondary data.
The present study contributes to the existing literature by analyzing those
countries whose results have relevant policy implications as they provide
additional insights into the PBC for newly democratized countries. The study
sheds light on whether political manipulation of economic policies for political
gains exists in these countries. In addition, it looks at whether membership of
the EU has any impact on the monetary policies of these countries, providing
insulation from the influence of politicians, particularly during election cycles.
Brief Review of the Relevant Literature
Keynesian political economists believe that the effect of the business cycle
could be minimized by implementing countercyclical fiscal and monetary
policies. Correspondingly, through monetary and fiscal policies, the government
could influence most aspects of economic life. However, it is argued that the
implementation of such policies could also be conducted based on political
motives rather than for economic stabilization (Nordhaus 1975). The former
would then lead to PBCs. Literature on PBCs can be broadly grouped into two
approaches: Classical (Opportunistic) PBCs and Partisan PBCs.
Classical (Opportunistic) PBC

The seminal work of Nordhaus (1975), which develops the PBC, presents
the politician as a rational utility maximizer. The politician will, therefore,
derive utility when he or she is reelected. Earlier results show that the PBC exists
in some countries that included the then-West Germany, New Zealand, and the
United States. However, only weak evidence was found in France and Sweden,
and no sign of the PBC was found in Australia, Canada, the United Kingdom,
and Japan (Basak, Ghosh, and Mukherjee 2019; Grier 1987; Keil 1988; Philips
2016; Rohlfs, Sullivan, and McNab 2015).
Abrams and Iossifov (2006) introduced the concept of the political monetary
cycle (PMC), which refers to a situation where the incumbent government
opportunistically manipulates monetary policy to improve the possibility of the
re-election of the incumbent. Abrams and Iossifov tested the PMC using U.S.
data for the period 1957-2004 and the results suggested the existence of the
PMC. However, Richards’ (1986) results contradict this finding as he reports the
nonexistence of the PMC.
Nordhaus (1975) implies voter myopia and the existence of a Keynesian
Phillips curve. These features provide the opportunity for politicians to fool the
voters by manipulating policy instruments during the preelection period. However,
this is criticized by Rogoff (1990), who outlined two important shortcomings of
this classical framework. First, this approach does not consider that elections
could be anticipated and, thus, systematic expansion in monetary policy could
be predicted, and expectations could be adjusted accordingly. Second, the model
neglects the possibility that voters’ decisions could be influenced by voters’
expectations concerning the post- election welfare associated with a certain
candidate. In other words, the retrospective assumption could be restrictive and
possibly misleading. To address these shortcomings, Rogoff (1990) assumed
that both voters and politicians are rational. Correspondingly, it means that
voters will try to predict future welfare not only by looking at the previous policy
changes, but also to try to evaluate the politician’s level of “competence”—how
much public good the politician could produce with a given level of taxes. Using
this framework, Rose (2006) and Baskaran and others (2016) find the existence
of PBCs, using data from 43 U.S. states for the period between 1974 and 1999.
Similar arguments of rationality were used by Lächler (1984), but he added
that the electorates are a sequence of overlapping generations. This could lead
to a different conclusion. He argues that different generations will have different
preferences and, hence, intergenerational conflict may exist. This means that
the PBC is not as a result of the myopic voters but because of intergenerational
conflict.
Drazen (2000) criticizes the classical PBC on its assumption that the president
can control the monetary authorities to implement favorable policies to heighten
re-election prospects using short-term expansionary monetary policy. Although
the criticism might be valid for countries with strong institutions where central
banks and other monetary authorities are independent, this would not be
the case in countries with weak institutions. A theory of active fiscal, passive
monetary policy was proposed for the former countries (Dubois 2016).
Golden and Poterba (1980) portend that politicians are also concerned
with their popularity and therefore extended the PBC model by incorporating
politician’s popularity that they argue will depend on the rate of inflation and
unemployment and the level of disposable income during the incumbent’s term.
Golden and Poterba use variables, such as changes in the federal surplus, federal
taxes, spending, transfers, and money supply to test the model. The results show
the existence of policy manipulation, but the impact and effectiveness of this
manipulation are limited. This could be because the effect of the policy change
occurs with a lag. Schultz (1995) adopting the PBC that incorporates popularity
suggests the existence of the PBC, but the results do not support the concept
of popularity as the manipulations take place only around the election periods.
Partisan PBCs
This is the second strand of the literature on the PBC that argues that the
ideological lineage of the political party matters in creating fluctuations in
economic activity (Weller 1983). The rational partisan theory (RPT) of the PBC
implies that ideological differences in the party may predict the way cycles will
occur. For instance, it is traditionally expected that left-wing parties will value
employment more than price stability, while right-wing party’s preferences are the
opposite. Helland (2011) analyzes the PBC using the RPT framework and reports
that there is no clear indication of the existence of PBCs in Norway, which he
attributes to institutional arrangements in the country where unemployment is
overseen by the legislative arm rather than the executive arm of the government.
However, Davidson, Fratianni, and Von Hagen (1992) contend that
governments will be involved in policy manipulation when they have low
popularity, but when their popularity is high, governments will concentrate on
ideological goals. Therefore, it allows the possibility of a threshold in certain key
macroeconomic variables, such as unemployment. Moreover, satisficing behavior
could explain why the government does not always manipulate macroeconomic
variables. Davidson, Fratianni, and Von Hagen (1992) investigated the existence
of the satisficing version of the PBC in the United States for the period 1905-84.
Their model uses the unemployment rate, inflation rate, the growth rate of GNP,
and the growth rate of the monetary base. Their findings suggest that the PBC
does exist for GNP, but not for unemployment, inflation, and the monetary
base. In other words, it supports the threshold theory.
PBC in Developing Democratic Countries

A strand of the literature investigates PBCs in developing democratic
countries that might not have developed the required institutions that can
prevent the incumbent executive from manipulating policies during elections
and the preelection periods. Soh (1988) investigated the existence of the PBC
during Chung Hee Park’s presidency in South Korea. His results suggest
that political disturbances through public demonstrations are influenced by
economic conditions and economic policies reflect the political response.
However, it is argued that the motivation for the PBC is lower in countries with
an authoritarian rule than in a democratic setting. This is because, in the former,
the general public does not play much of a role in the emergence of the political
leaders, unlike in the latter.
Sieg and Batool’s (2012) work on Pakistan indicated the presence of an
opportunistic PBC where unemployment decreases before the election and rises
after the election and inflation shows the opposite pattern. Vazque and Martínez
(2016) found that the PBC exists in Mexico. The research demonstrates that
the incumbent politicians manipulate economic policies, as represented in the
form of excessive public spending during the period before the election. Similar
results are also reported by Plaček and others (2016).
Overview of the Democratic Institutions in the Countries Studied
As mentioned above, this analysis is undertaken on ten newly democratized

former European socialist countries. The countries can be grouped into three,
based on their political structures. Group (i) consists of those that operate a
semi-presidential system. This is a system where the constitution provides for
both a popularly elected president and a prime minister, but the cabinet is
accountable to the parliament. The presidents, directly elected, share executive
powers with the prime ministers and the cabinet (Tyushka 2019). The countries
that operate this system in the sample are Lithuania, Poland, and Romania.
Group (ii) comprises countries that adopted a parliamentary democracy. This is
a government with the prime minister as the head of the government while the
president is the official head of state, who only has ceremonial powers. The prime
minister is usually an elected member of the parliament while the president is
not but can be directly elected or appointed by the parliament. Even where the
president is directly elected by the public, most of the executive powers reside
with the prime minister who is appointed by the president. Countries with such
arrangements in the sample are the Czech Republic and Slovakia. Group (iii)
constitutes countries that operate parliamentary representatives, which refers
to the arrangement where the president and the parliament are elected directly
by the public and the prime minister is elected by the parliament. In another
form of this government, the president is indirectly elected by the parliament
but has no right to appoint the prime minister. The presidents are figureheads
with no executive powers. Most of the countries in the sample operate this form
of government: Albania, Bulgaria, Estonia, Hungary, and Latvia.
It is evident from the foregoing discussion that the role of presidents and
prime ministers in the sample varies (summarized in Table 1). One thing that
Table 1. Summary of the Political Systems in the Countries
Type of Political Main Executive Power Elections Countries

System
Semi-presidential President and Prime Presidential election in Lithuania, Poland,

Minister which the president Romania
is elected by popular
vote
Parliamentary Prime Minister is Presidential elections in Czech Republic
democracy appointed by which the president (after 2012) and
president is elected by popular Slovak Republic
vote
Parliamentary Prime Minister Parliamentary elections Bulgaria, Estonia,
representative appointed by the and the parliament Hungary, Latvia,
parliament appoints the Prime Albania, Czech
Minister Republic (before
2012)
is generally common in all the systems is the central role that elections play
in establishing the governments. This provides incentives for the incumbent to
manipulate economic policies for their short-term gains in terms of electoral
victories.
Data and Empirical Methodology
Data
The dataset used in this analysis consists of inflation, unemployment, GDP
per capita growth, government expenditure, tax revenue, measures of broad
money, M1, and institutional quality indicators. The dataset covers the period
between 1990 and 2018 for the ten countries. All the variables are sourced from
the World Bank, except the monetary policy variables that are from the national
countries’ central bank and the ECB. Inflation is measured as annual percentage
changes in the consumer price index. Unemployment is the percentage of the
labor force that is not in employment, but actively seeking employment. Figure 1
presents average inflation and unemployment in the sample countries. The figure
shows high episodes of inflation in the 1990s, but it stabilizes by the end of the
decade. Unemployment, in contrast, increased from almost zero at the beginning
of the 1990s to about 13 percent by the middle of the decade.
The government expenditure variable is represented by general government
final consumption expenditure (as a percentage of GDP). This consists of all
government current expenditure for goods and services (including employees’
wages). It also includes government military expenditure. Another indicator of
fiscal expansion is tax revenue, which comprises forms of taxes that are payable
Figure 1.
Average Inflation and Unemployment in Selected Countries
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to the central governments, but it excludes fines, penalties, and social security
contributions.
The GDP per capita is an annual percentage growth of GDP per capita in
2010 U.S. dollars. The narrow measure of money is defined as total coins and
notes in circulation and other money equivalents that are easily convertible into
cash as defined by the National Central Banks (NCB). The broad measure of
the money supply, used in this study, consists of the sum of currency outside
banks; demand deposits other than those of the central government; the time
savings and foreign currency deposits of the resident sectors other than the
central government; bank and traveler’s checks; and other securities such as
certificates of deposit and commercial paper (annual percent change).
Regulatory quality and “voice and accountability” are the measures of
institutional quality. Voice and accountability mainly measure the perception of
citizens regarding their ability to participate in the emergence of the governments,
while regulatory quality reflects the perceptions of the citizens concerning their
ability to influence the government when it formulates and implements sound
policies and regulations (Worldwide Governance Indicators 2018). Both indices
range from approximately −2.5 (weak) to 2.5 (strong).
The empirical methodology adopted in this article follows the extant
literature, particularly Soh (1988), Sieg and Batool (2012), Rohlfs, Sullivan, and
McNab (2015), and Enkelmann and Leibrecht (2013), among others. Table 2
presents the summary statistics of the variables used in the analysis. Inflation
was high at the beginning of the sample, which coincides with the beginning of
Table 2. Summary Statistics
Variables Obs Mean St. Deviation Minimum Maximum
Inflation 311 12.52 9.02 1.54 125.37

Unemployment 297 6.06 1.98 2.800 27.60
Real GDP growth 296 3.47 5.14 −2.76 15.15
Tax revenue 251 .02 2.19 .01 22.18
Regulatory quality 201 .73 .51 −.49 1.67
Money supply 273 1,437.08 10.00 231.36 61,552.50
both political and economic reforms. This is depicted in Figure 1 where inflation
was persistently high from 1990 through to the end of the decade. However,
inflation later subsides in almost all the countries in the sample. The average
inflation for the sample period is 12.56 percent and the minimum is 1.5 percent
while the maximum is 25.37 percent. Unemployment has a mean of 6 percent
and the real growth per capita recorded has a mean of 3 percent. The variable
that has the highest standard deviation is the money supply and is followed by
inflation.
PBCs, Inflation, and Real GDP Growth

The PBCs models assume the existence of a manipulative Phillips curve,1
that depicts a trade-off between inflation and unemployment, and myopic
political agents who vote based on the state of the economy. The performance
of the economy is considered just before the period of the election. Using this
argument, the relevant literature on PBCs demonstrates that an incumbent
politician can implement expansionary monetary and/or fiscal policy to reduce
the unemployment rate, while putting up with a higher inflation rate. However,
the New Classical counterrevolution of the 1970s showed that this scenario
would be difficult to achieve under a rational expectation setting.2 But empirical
results in which rational expectations are embedded do not seem to support this
argument (Keil 1988).
It is a common practice for governments to implement stabilization
policies using fiscal policy. This is done by reducing the tax rate or increasing
government spending to boost economic activities. The reduction of the tax
rate will come with a reduction in government revenue that will lead to a budget
deficit. A similar scenario can also ensue in the case of increases in government
1 The Phillips curve was originally developed by A. W. Phillips to relate inflation and unemployment
in an inverse relationship.
2 Rational expectations is an economic theory developed by Muth (1961) that argues an individual’s
decision-making process uses all the best available information as well as previous experiences. It
argues that economic agents make mistakes in the process, but they learn through them and adapt.
Therefore, on average, they would be right.
spending. Thus, a reduction or increase in tax revenue can signal expansionary

or contractionary fiscal policy. Following this, tax revenue is used as a proxy for
the budget deficit and it is assumed that it is negatively related to the inflation
rate and positively related to the unemployment rate.
An expansionary fiscal policy could lead to economic growth by increasing
the level of activity, but it has a potential cost in terms of rising inflation rates. It
may also have an upward pressure on interest rates, which will lead to a crowding-
out effect. That is, as the interest rate rises, it raises the cost of borrowing for
businesses and households. Such a scenario could discourage borrowing and
investments and can lead to a reduction in economic activity.
Effects of Monetary Policy Changes

Monetary policy affects changes in the money supply within the economy
that affects the rate of interest. Monetary policy is generally handled by central
banks on behalf of the government. The high inflation episodes of the 1970s
and the 1980s led to the arguments that central banks should be granted
independence so that they can tackle inflation. Since the 1990s, most developed
countries granted their central bank independence but legislate to maintain
price stability by setting inflation targets. Inflation target regimes have become
the cornerstone of monetary policy in the 1990s, up to the financial crisis of
2008. That period was characterized by both low inflation and unemployment
rates. Hence, it is known as the “great moderation” period in the literature.
Countries in the sample that are members of the Euro have the European
Central Bank (ECB) as their central bank. As ECB is granted independence
by the Maastricht Treaty, the countries also, by extension have independent
monetary authority. Since January 1, 1999, the ECB is solely responsible for
monetary policy for all countries that adopted the Euro (European Central Bank
2019). The ECB and NCB of the member countries constitute the European
System of Central Banks (ESCB). The function of the ESCB is enshrined in
Article 3 of Protocol (No. 4) of the Treaty. Countries that have not adopted
the Euro will have to have their monetary policy tied to that of the ECB if they
aspire to join the Euro in the future. Hence, the analysis considers both periods
when the countries are members and the period before they joined the EU. The
impact of monetary expansion, in the form of increasing M1 will be positively
related to inflation and negatively related to unemployment while monetary
contraction will have the opposite effect.
Quality of Institutions
Quality of institutions is important in PBCs. For example, in countries with
independent central banks, incumbents would find it difficult to manipulate the
monetary policy to their own advantage, which will prevent the development
of the PBCs. This is consistent with findings in some publications that looked
at PBCs in developed countries, particularly the Euro area. The quality of
institutions varies in the sample. Issues such as corruption, excessive powers of

the executives, adherence to the rule of law, etc., can be factors that would enable
the incumbents to manipulate economic policies. Consequently, we include
indicators of the quality of institutions to account for this. The indicators used
are voice and accountability, and regulatory quality as defined above. A higher
quality of the institution is expected to reduce both inflation and unemployment.
Therefore, membership of the Euro is expected to play a role.
The Impact of Elections on Economic Policies

The main purpose of this work is to identify the impact of the election on
government economic policies. In a classical PBC, it is assumed that presidents
could alter macroeconomic policies to their advantage. However, as in the
foregoing, most of the countries are not operating a presidential system of
government, but a semi-presidential version where the main political figures
with executive powers are the prime ministers. The systems in the countries are
parliamentary representative and parliamentary democracies. In the former, the
prime ministers are appointed by the parliament while in the latter the prime
ministers are appointed by the president. Therefore, the classical assumption
concerning the presidential elections needs modification.
First, the political party or president aims to achieve reelection and, thus, it
is sensible to assume that the appointed prime minister tries to create favorable
fiscal and monetary expansion in an election period to ensure its own re-
appointment. Therefore, in a semi-presidential and parliamentary democracy,
elections could lead to economic policy manipulation that can cause PBCs
because the president has executive powers or that the president has the power
to appoint the prime minister, thus, success in presidential elections for the
incumbents in such systems is vital. However, in a parliamentary representative
system, parliamentary elections are more important and, hence, can be the main
drivers of PBCs. This is because the appointment of a prime minister is carried
out by the elected parliament. Table 1 provides a summary of election dates in
the sample countries.
Models for Fiscal Manipulation

Based on the above discussions, the econometric model follows the literature
and the model to investigate fiscal manipulation is specified as follows:
Infi,t = 𝛼 i,t + RGDPi.t + Trevi,t + Gexpi.t + GexpElei,t

(1)
+ TrevElei,t + Elei,t + voicei,t + Regi,t + ui,t
where Inf is inflation, RGDP represents real annual growth of GDP per
capita, Trev denotes the annual percentage of tax revenue, Gexp is the annual
percentage of general government final consumption expenditure, while Ele
represents the election year. The voice is the voice and accountability variable
and Reg represents the regulatory quality. A similar model for unemployment
is represented as
Unemi,t = 𝛼 i,t + RGDPi.t + Trevi,t + Gexpi.t + GexpElei,t

(2)
+ TrevElei,t + Elei,t + voicei,t + Regi,t + ui,t
where Unem is the total annual unemployment rate change and the rest of
the variables are as defined above. The two models above also incorporate
interactive terms to test the interaction between an election date dummy and the
government expenditure as well as between the tax revenue and election date.
Models for Monetary Policy Manipulation

The models for monetary policy manipulation are specified similarly
to that of fiscal policy manipulation, but changes in money supply (MS)
are included in the model as an explanatory variable. Two measures of the
money supply are used in the estimation: a narrow measure, M1, and broad
measures. This is to check which of the measures is more sensitive to political
manipulation. Therefore, models for inflation and unemployment are specified
as follows:
Infi,t = 𝛼 i,t + RGDPi.t + MSi.t + voicei,t + Regi,t + Elei,t + ui,t (3)
Unemi,t = 𝛼 i,t + RGDPi.t + MSi,t + voicei,t + Regi,t + Elei,t + ui,t (4)
The Euro money supply is considered to disentangle the effect of the

ESCB’s monetary policy. As the ESCB is an independent monetary authority,
the central banks of the EU may not be manipulated by the incumbent solely
for their political interest. However, the same may not be the case before the
countries joined the EU. To address this, the sample is split into two subperiods
for countries that have become members of the EU during the sample period:
before joining the EU and after. This allows a comparison of the countries’
results before joining the EU and after they become members, as well as those
for the countries that are not members. These models, therefore, are able to
evaluate not only the role of the quality of institutions in PBCs, but also the
effects of membership of the EU.
The use of either fixed or random effects estimators in empirical work is not
a settled issue in the literature. The convention is to use the Hausman test to
decide which of the two models to use. However, this is not a universally accepted
approach (see e.g., Bell et al. 2019; Townsend et al. 2013). A counterargument
requires that the nature of the data should be taken into consideration.
Consequently, to be on the safe side, we have used both estimators as well as the
Hausman test.
Discussions of the Estimated Results
The estimation follows the established procedure in the literature by running

both fixed and random effects and the use of the Hausman test to determine the
better model. A generalized least squares estimation technique is used in addition
to check for the robustness of the results.3
Fiscal Manipulations
Table 3 presents results from the fiscal models and estimates of both
random and fixed effects. Although the Hausman test suggests that the random
effects models are preferred, the results from the fixed effects are qualitatively
similar to those of the random effects. Therefore, this indicates the robustness
of the results. The results indicate that the real GDP per capita is significant
and has the expected sign in all the four specifications reported in the table. In
practical terms, the negative and significant coefficient on real GDP per capita
means that an improvement in economic activity leads to a reduction in both
inflation and unemployment rates, which is consistent with the economic theory.
The results are, therefore, consonant with the literature arguing that raising
economic activity improves the economic performance in terms of a reduction
of unemployment in particular—hence the incumbent would be tempted to try
to do that just before elections. The election has a noticeable effect on inflation,
which is 21.43 percent higher than in nonelection periods. The reported results
also show that the marginal increase in government expenditure will cause
inflation to decline by 6.2 percent. Thus, the results indicate the existence of the
PBCs as it is evident that elections and government expenditure have significant
effects on inflation.
The coefficients on the quality of institutions,regulatory quality, and voice
and accountability are significant in the inflation model with the expected
signs. This highlights the importance of the quality of institutions in PBCs.
Transparency and inclusivity will help to prevent the PBCs as this can play a
role in curbing the powers of the incumbent to manipulate economic policies
for their advantage. The results on regulatory quality suggest similar effects as
the higher the quality of the institution, the more difficult it is for the incumbent
to embark on PBC activities. These are consistent with findings in the relevant
literature which state that the PBCs are either insignificant or do not exist in
countries with strong institutions.
The results of the unemployment model underscore the significance of
government expenditure and government expenditure in the year of elections.
Both the total revenue and the interacting term between government expenditure
and the election year have a downward pressure on unemployment. Overall, the
3The full results are not presented in this article for reasons of parsimony. They are available from
the authors on request.
Table 3. Results from the Models on Fiscal Policy
Variables Dependent Dependent Var: Dependent Dependent Var:

Var: Inflationa Unemploymentb Var: Inflationa Unemploymentb
Real GDP −2.16* −.22*** −2.73** −.22***

(1.11) (.02) (1.11) (.02)
Govt expenditure −6.28** −.051** −3.192 −.08
(3.15) (.06) (3.32) (.06)
Total revenue 1.10 −.06 −1.49 −.18***
(2.14) (.04) (3.28) (.06)
(.05) (.05)
Election 21.43** .15 16.76 .15
(10.61) (.219) (10.57) (.21)
(Govt expenditure) −15.08** −25.07*** .15
* Election (3.52) (8.83) (.17)
(Total revenue) * 5.94 .18**
Election
Reg −25.89*** −.61
(4.06) (.43) (4.34) (.09)
Voice 23.72*** .26 16.14** .64***
(7.05) (.11) (6.97) (.14)
Observations 247 244 247 244
Number of 10 10 10 10
countries
Random effect Random effect Fixed effect Fixed effect
preferred by preferred by
Hausman Hausman test
test
R-squared .43 .42 .45 .44
Notes: Figures in parentheses are standard errors.
aEstimated using the model in Equation (1).
bEstimated using the model in Equation (2).
***p < .01; **p < .05; *p < .1.
results are consistent with the literature and show evidence of the existence of
the PBCs.
Monetary Policy Manipulations

Tables 4 and 5 present results from the monetary policy manipulation models
that report results with the random and fixed effects, respectively. The samples
are also split into two: EU members and non-EU members. This allows us to
disentangle the effect of the EU institutions, particularly the ECB as discussed
above. Results in Table 4 indicate that real growth is highly significant in reducing
both inflation and unemployment irrespective of the measure of money supply
Table 4. Results from Monetary Policy Models—Random Effects
Variables Subsample: Subsample:

Subsample: Subsample: Non-EU EU
Non-EU Members EU Members Members Members
Dependent Var: Dependent Dependent Dependent
Inflationa Var: Inflationb Var: Inflationa Var:
Inflationb
Broad money .561*** −.01

(.07) (.01)
Euro broad money −.03 −.04
(.15) (.06)
Real GDP −.864 .240*** −1.409*** .216***
(.575) (.0512) (.394) (.0655)
Election −1.287 −.598 −1.471 −.916
(4.522) (.498) (4.356) (.989)
Regulatory quality −16.45** 1.232 −3.881 3.036
(6.809) (1.486) (4.857) (2.336)
Voice 20.05** −.994 6.597 −2.216
(9.104) (1.694) (6.322) (2.229)
Constant 12.19** −.228 4.957 −.769
(4.928) (.918) (3.491) (1.152)
R-squared .36 .37 .42 .64
Number of countries 9 9 10 9
Hausman test Random effect Random effect Random effect Random
preferred preferred preferred effect
preferred
Notes: Standard errors in parentheses.
aEstimated using the model in Equation (3) with different measures of money supply for non-EU
members.
bEstimated using the model in Equation (3) with different measures of money supply for EU
members.
***p < .01; **p < .05;
used. This is the case for both EU and non-EU members. The most important
difference for EU and non-EU members is the result on institutional quality and
the money supply. These variables are significant in non-EU members, but they
are not in EU members. This shows the importance of institutions in mitigating
PBCs as argued in the literature.
The results in Table 5 present the fixed effects estimates, which are
qualitatively similar to those of the random effects reported in Table 4.
The analysis also grouped the countries into non-EU and EU members. As
expected, measures of the broad money supply for the non-EU members are
Table 5. Results from Monetary Policy Models—Fixed Effects
Variables Subsample: Subsample:

Non-EU Subsample: EU Non-EU Subsample: EU
Members Members Members Members
Dependent Var: Dependent Var: Dependent Var: Dependent Var:
Unemploymenta Unemploymentb Unemploymenta Unemploymentb
Money −4.98 −3.22***

supply (7.58) (1.00)
Euro-money −.03* −.01
supply (.01) (.08)
Real GDP −.08* −.32*** −.0917** −.18**
(.04) (.04) (.03) (.07)
Election .54 −.97 1.29** .65
(.37) (.95) (.52) (1.25)
Regulatory −.68 −2.100 −.63 .84
quality (.56) (1.47) (.56) (2.88)
Voice .89 2.78* .71 .663
(.75) (1.67) (.72) (2.786)
Constant −.02 .91 −.15 −.601
(.41) (.85) (.40) (1.445)
R-squared .37 .45 .51 .48
Number of 9 9 10 9
countries
Fixed effect Fixed effect Fixed effect Fixed effect
Notes: Standard errors in parentheses.
aEstimated using the model in Equation (4) with different measures of money supply for non-EU
members.
bEstimated using the model in Equation (4) with different measures of money supply for EU
members.
***p < .01; **p < .05; *p < .1.
positive and significant, but not for the EU members. Institutional indicators
are more important to the non-EU members than the EU members. This
might be due to the fact that the latter has established and developed
institutions.
The low quality of institutions plays a role in the existence of the PBCs.
However, the PBCs could exist even in countries with high-quality institutions
as argued by Galasso and Nunnari (2019). This is because the PBCs can be
manifested through fiscal manipulation of economic policies before the elections,
this is particularly in countries with powerful presidents, such as in the United
States (Abrams and Iossifov 2006).
Conclusions
This article investigates the existence of the PBCs in the newly democratized
former European socialist countries. The analysis covers ten countries where, in
addition to the whole sample analysis, the study also undertook two separate
monetary manipulation investigations based on whether countries are members
of the EU or not. This helps to determine the influence of the EU membership
on the development of the PBCs. Manipulations of both fiscal and monetary
policies for electoral gains are looked into, as well as the role of the quality of
institutions being incorporated into the empirical models.
The conclusion from the fiscal models supports the existence of the PBCs
in these countries. The results are consistent in most of the specifications of
the models. Measures of institutional quality produced strong effects that
mitigate the PBCs. However, the general picture from the monetary policy
results is different as membership of the EU has a strong negative impact on
the PBCs. The monetary policy models indicate that countries that are members
of the EU could not manipulate their monetary policy for political gains while
it is the opposite with the non-members. The findings are consistent with the
literature that argues institutions are important for the existence of the PBCs.
Political incumbents in countries with weak institutions would find it possible to
manipulate policies for electoral gains whereas countries with strong institutions
would find it difficult to do that.
The general policy implications from the results are that countries need to
improve their institutional quality to address the PBCs which will be beneficial
to their economies as policies will be formulated and implemented based on the
economic interests of the countries. Such a policy could be through joining an
existing union that has strong institutions as shown here by being a member of
the EU or by strengthening individual countries relevant institutions as evident
in the results of the non-EU members. However, it is important to note that
democratic institutions alone are not adequate to stem the PBCs, but what is
important is nurturing strong institutions that would not allow the incumbent
to manipulate the system for their short-term political goals.
About the Authors
Abdullo Pulatov is a member of the staff of Westminster International

University in Tashkent, Uzbekistan. Abdullo teaches on a range of modules
at the foundation and undergraduate levels. His research interest mainly lies in
the economics and policies of post-communist countries with a specific focus
on political business cycles. Abdullo has previously worked as an Economic
Development Consultant at Leon Consult Invest Ltd. and for the Treasury
Department of The Republic of Uzbekistan.
Ahmad Hassan Ahmad is a Researcher at the School of Business and

Economics, Loughborough University, UK, where he teaches Economics.
Ahmad’s research interests include macroeconomic dynamics and open-economy
issues. Specifically, Ahmad has researched the role of monetary and fiscal policy
on economies of developed and developing countries and the importance of
the relationship between fiscal and current account deficits. He has published
on these topics in peer-review journals including Economics Letters, Journal of
International Financial Markets, Institutions and Money, Review of Quantitative
Finance and Accounting, The Manchester School, Open Economies Review, and
Journal of Economic Surveys.
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Political Business Cycles in Post-­Communist

This article analyses political business cycles (PBCs) in ten former

Ciclos económicos políticos en los países europeos poscomunistas

Este artículo analiza los ciclos económicos políticos en diez antiguos

Current political decisions, particularly those that affect capital stock

could also be caused by public policy manipulations by the incumbents. This

Brief Review of the Relevant Literature

Classical (Opportunistic) PBC

PBC in Developing Democratic Countries

Overview of the Democratic Institutions in the Countries Studied

As mentioned above, this analysis is undertaken on ten newly democratized

Table 1. Summary of the Political Systems in the Countries

Type of Political Main Executive Power Elections Countries

Semi-­presidential President and Prime Presidential election in Lithuania, Poland,

Data and Empirical Methodology

Table 2. Summary Statistics

Variables Obs Mean St. Deviation Minimum Maximum

Inflation 311 12.52 9.02 1.54 125.37

PBCs, Inflation, and Real GDP Growth

spending. Thus, a reduction or increase in tax revenue can signal expansionary

Effects of Monetary Policy Changes

institutions varies in the sample. Issues such as corruption, excessive powers of

The Impact of Elections on Economic Policies

Models for Fiscal Manipulation

Infi,t = 𝛼 i,t + RGDPi.t + Trevi,t + Gexpi.t + GexpElei,t

Unemi,t = 𝛼 i,t + RGDPi.t + Trevi,t + Gexpi.t + GexpElei,t

Models for Monetary Policy Manipulation

Unemi,t = 𝛼 i,t + RGDPi.t + MSi,t + voicei,t + Regi,t + Elei,t + ui,t (4)

The Euro money supply is considered to disentangle the effect of the

Discussions of the Estimated Results

The estimation follows the established procedure in the literature by running

Table 3. Results from the Models on Fiscal Policy

Variables Dependent Dependent Var: Dependent Dependent Var:

Real GDP −2.16* −.22*** −2.73** −.22***

***p < .01; **p < .05; *p < .1.

Monetary Policy Manipulations

Table 4. Results from Monetary Policy Models—­Random Effects

Variables Subsample: Subsample:

Broad money .561*** −.01

Table 5. Results from Monetary Policy Models—­Fixed Effects

Variables Subsample: Subsample:

Money −4.98 −3.22***

About the Authors

Abdullo Pulatov is a member of the staff of Westminster International

Ahmad Hassan Ahmad is a Researcher at the School of Business and

Muth, John F. 1961. “Rational Expectations and the Theory of Price

Accessed on February 7, 2021. Available online at https://www.jstor.org/stabl​

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Political Business Cycles in Post-Communist

Semi-presidential President and Prime Presidential election in Lithuania, Poland,

Real GDP −2.16* −.22* −2.73 −.22***

p < .01; p < .05; p < .1.

Table 4. Results from Monetary Policy Models—Random Effects

Table 5. Results from Monetary Policy Models—Fixed Effects

Accessed on February 7, 2021. Available online at https://www.jstor.org/stabl