Transparency, Political Polarization, and Political Budget Cycles in OECD Countries

Abstract

We investigate the effects of fiscal transparency and political polarization on the prevalence of electoral cycles in fiscal balance. While some recent political economy literature on electoral cycles identifies such cycles mainly in weak and recent democracies, in contrast we show, conditioning on a new index of institutional fiscal transparency, that electoral cycles in fiscal balance are a feature of many advanced industrialized economies. Using a sample of 19 OECD countries in the 1990s, we identify a persistent pattern of electoral cycles in low(er) transparency countries, while no such cycles can be observed in high(er) transparency countries. Furthermore, we find, in accordance with recent theory, that electoral cycles are larger in politically more polarized countries.