Governments, Elections and the Economy

Bill Clinton said, It's the economy, stupid! Governments since 1945 have believed they have considerable control over the macro-economy through the manipulation of fiscal and monetary policy levers. Rational political agents will use all the resources at their disposal to maximise their political 'profits' at election time by aiming to satisfy voters' economic demands, and so the performance of the macro-economy becomes susceptible to endogenous government influence, the adoption of an economic strategy aimed at securing re-election. Thus emerges the concept of a political business cycle, whereby the direction and timing of changes in macroeconomic variables reflect political priorities. This work presents the major developments in the political business cycle literature, both theoretical and empirical; develops a model of political-economic outcomes with endogenous government of particular relevance to the UK; and evaluates the model in the context of the UK experience from 1950-92, using statistical data. The work should be useful to all academics, professionals and voters who have an interest in our political processes and economic performance.