ABSTRACT
It is widely believed that political factors (elections, partisan motives, and bureaucracy) are crucial in determining economic policies and in turn economic outcomes.1 The early literature based on rational expectations focused on the link between elections and fiscal policy. For instance, Rogoff and Sibert (1988) showed how the incumbent political party manipulates policy instruments in an attempt to increase its re-election probability. Persson and Svensson (1989) and Alesina and Tabellini (1990) developed two-party models to show how fiscal and public debt policy can be used strategically by the incumbent party to influence the choices of its successor. In Lockwood et al. (1996), electoral uncertainty reduces the marginal cost of public debt and this leads to relatively loose fiscal policy before elections, in the form of over-spending, under-taxing and over-borrowing.
