Partisan Business and Budget Cycles with Separate Fiscal and Monetary Authorities

This paper studies partisan business and budget cycles in a setup where only fiscal policy is under the full control of the elected government, while an independent central bank makes monetary policy decisions. The government and the central bank are therefore engaged in a non-cooperative game. It is shown that a leftist government produces higher inflation, but contrary to the earlier results, lower output than a rightist government in all election and non-election periods. A leftist government also tax and spend more than a rightist government. The model produces both partisan business and budget cycles due to the timing of elections. Partisan budget cycles are a novel concept and are analyses of post-election fiscal movements as opposed to the pre-election analyses in political budget cycles literature. Copyright 1998 by Blackwell Publishers Ltd and The Victoria University of Manchester