Alternative Approaches to the Political Business Cycle

Abstract

It is impossible to consider the ordinary course of affairs in the United States without perceiving that the desire to be re-elected is the chief aim of the President;... and that especially as [the election] approaches, his personal interestakes the place of his interest in the public good.-Alexis de Tocqueville, Democracy in America WHILE political economy has increasingly concentrated upon the behavior of markets, in some areas it is impossible to ignore the interaction between economic motivation and political decisions. The theory of the political business cycle, which analyzes the interaction of political and economic systems, arose from the obvious facts of life that voters care about the economy while politicians care about power. This paper reviews the theory and evidence about interacting politicoeconomic systems in the theory of the political business cycle (PBC). The first section begins with an overview of different approaches to political cycles. The following two sections review some theoretical issues, with attention to the issue of the behavior of political parties and a formal examination of PBC models. The final sections assess whether the PBC models are consistent with historical evidence.