The opportunistic model
Nordhaus (1975) assumed that governments care most about reelection and that voters judge only recent economic conditions and form expectations of inflation from past experience. If there is a short-run trade-off between unemployment and inflation, as in the Phillips curve, a government benefits from loosening policy just before an election to cut unemployment and boost the economy, deferring the resulting inflation until after the vote. The economy then cycles between stimulus and austerity in step with elections. Tufte (1978) pointed to evidence such as increases in transfer payments like social security benefits before US elections.
Partisan models and rational expectations
Hibbs (1977) argued that parties have different economic goals because their constituencies differ: left parties backed by workers concentrate on reducing unemployment, while right parties backed by asset holders focus on price stability. With the rise of rational expectations in the 1970s, critics argued that such simple manipulation would fail if voters anticipated governments' intentions. In response, Alesina (1987) proposed rational partisan theory, in which electoral uncertainty produces temporary output differences only just after changes in government, and Rogoff and Sibert (1988) offered a signaling model in which governments adjust fiscal policy before elections to display competence.
Political budget cycles and evidence
Rogoff (1990) focused less on the economy itself than on political budget cycles, in which visible spending rises and taxes fall before elections. Assessing 25 years of research, Drazen (2000) concluded that with greater central bank independence, cycles are clearer in fiscal than in monetary policy. Analyzing cross-national data, Brender and Drazen (2005) reported that such budget cycles occur mainly in new democracies with little democratic experience and are weak in established ones. Further research finds that voters' economic knowledge, media scrutiny and fiscal rules shape the size of cycles.
FAQ
- What is the political business cycle in simple terms?
- It is the pattern in which a government boosts the economy just before an election to win and then tightens afterward to deal with the side effects, so the economy rises and falls with the electoral calendar.
- How do the opportunistic and partisan models differ?
- The opportunistic model holds that any party stimulates the economy before elections to win reelection, while the partisan model holds that economic policy differs with party ideology and constituencies, such as left parties prioritizing jobs and right parties price stability.
Sources reviewed: 2026-10-26
References
- Nordhaus, W. D. (1975). The political business cycle. Review of Economic Studies, 42(2), 169–190. The original opportunistic political business cycle model.
- Hibbs, D. A., Jr. (1977). Political parties and macroeconomic policy. American Political Science Review, 71(4), 1467–1487. The partisan model: left parties target unemployment, right parties inflation.
- Tufte, E. R. (1978). Political Control of the Economy. Princeton, NJ: Princeton University Press. Classic evidence on pre-election economic manipulation.
- Alesina, A. (1987). Macroeconomic policy in a two-party system as a repeated game. Quarterly Journal of Economics, 102(3), 651–678. Rational partisan theory under rational expectations.
- Rogoff, K., & Sibert, A. (1988). Elections and macroeconomic policy cycles. Review of Economic Studies, 55(1), 1–16. Competence signaling and pre-election policy cycles.
- Rogoff, K. (1990). Equilibrium political budget cycles. American Economic Review, 80(1), 21–36. Equilibrium political budget cycles.
- Drazen, A. (2000). The political business cycle after 25 years. NBER Macroeconomics Annual, 15, 75–117. A 25-year assessment favoring fiscal over monetary cycles.
- Brender, A., & Drazen, A. (2005). Political budget cycles in new versus established democracies. Journal of Monetary Economics, 52(7), 1271–1295. Budget cycles are driven by new democracies.