Tying One’s Hand: The Effect of Fiscal Rules on the Political Business Cycle in Africa

Abstract

In this paper, we test whether fiscal rules can act as a constraint on the ability of incumbent politicians to generate political business cycles using fiscal and monetary expansions, to improve their re-election prospects. Using data on fiscal rules for a sample of thirty-two African countries, fourteen of which have a budget balanced rule, our results show that stringent fiscal rules can indeed dampen political cycles. In particular, we find that prior to a presidential election, there is a statistically significant increase in money growth, but that increase is on average 50% less in countries with fiscal rules compared with countries with no rule. Our results hold even when we control for institutional quality, developmental assistance or electoral competitiveness. Moreover, we find evidence of political cycles in African dictatorships, which we argue potentially reflect African dictators’ strong desire to reduce the occurrence of civil unrest during elections.