Some economists have argued that business cycles may be an artifact of elections held by governments; alternately, election results may be strongly affected by the business cycle.

Government elections causing business cycles[]

Alberto Alesina suggested that one possible model would have two competing political parties, one of which particularly disliked inflation and the other disdainful of employment. In this model, economic actors would make long-term decisions based on the estimated probability of either party winning control of the government in upcoming elections. When each election arrives, one party definitely wins the election, resulting in surprise inflation or deflation.

A signaling theory of leadership suggests that politicians may manipulate macroeconomic variables to demonstrate that they are talented, competent, responsive, or caring. However, it is generally acknowledged that politicians prefer to have their best economic results in the last period prior to an election, rather than in the period immediately following a victory; this is not clearly compatible with the signaling theory, though possibly it is the result of a matching problem, where information about the politician's quality is only revealed to voters over time.

Signal-jamming models have also been proposed. The central idea of such models is that political leaders must send inflated signals of competence merely to satisfy voters. Perhaps voters are constantly searching for an exceptionally talented leader whom they expect to outperform historical results, and therefore every successive leader must show unusual improvement merely to be kept on. (This may be likened to the phenomenon where only outstanding recommendation letters are seen as revealing any information about a job applicant's quality; merely good recommendation letters are seen as indicating average applicant quality, if not worse.)

Business cycles affecting government elections[]

In American elections, it has been suggested that voters associate the Democratic Party with free-spending policies, whereas Republicans are associated with fiscal austerity. Therefore, Democrats are elected in response to good business conditions, while Republicans are elected in response to poor business conditions.


Lecture by Tyler Cowen, fall 2005.