Political business cycles at the municipal level

Abstract

Abstract:This article tests for the existence of rational political business cycles models using a large and unexplored data set of Portuguese municipalities. The data set is well-suited for this purpose because it provides a high level of detail on expenditure items, becausePortuguese municipalities are homogeneous with respect to policy instruments and institutions and follow an exogenously determined election schedule. Estimation results clearly reveal the existence of opportunistic behaviour by local governments.Expenditures increase in pre-election periods, especially on items that are highly visible to the electorate (e.g., highways and streets). This suggests an effort to signal competence and improve chances of re-election.

Public spending interactions and local politics. Empirical evidence from French municipalities

“…As the coefficients on lagged public spending provide an estimate γ varying between 0.287 and 0.772, the first point to note is the relatively high level of persistency in wages. As in Veiga and Veiga (2007), this result confirms both the consistency of the autoregressive specifica- 9 We compute the robust LM test statistics for spatial lag dependence and for spatial error dependence (see Anselin et al 2007). Results depend on the weighting scheme, either W d or W Pol .…”

“…Tables 1 and 2 show the estimation results of this dynamic using the distance decay matrix and the political matrix for each category of public spending (primary and current expenditures in Table 1 and salaries and investment expenditures in Table 2). We include the lagged dependent variable, because municipality expenditures are likely to change only slowly over time (Veiga and Veiga 2007). As the previous estimators are likely to be inconsistent when including the lagged dependent variable in the regression and as there is some persistence of expenditures, we estimate the extended GMM estimator 10 as suggested by Blundell and Bond (1998) in addition to the IV estimator of the spatial coefficient (ρ).…”

“…This approach is notably used by Brueckner (1998), Saavedra (2000), and Brueckner and Saavedra (2001). Finally, following Devereux et al (2002), Dreher (2006), Redoano (2007), Veiga and Veiga (2007), we include the lagged dependent variable Z i,t−1 in order to take the autoregressive component of the time series into account. The system of equations can be written as follows:…”

“…However, as there is some persistence of expenditures, it may be appropriate to estimate system-GMM (Veiga and Veiga 2007). Basically, Blundell and Bond (1998) show that this extended GMM estimator is preferable to that of Arellano and Bond (1991) when the dependent variable, the independent variables, or both are persistent.…”

Political Business Cycle in the Czech Republic: Case of Municipalities

“…The research findings confirm existence of the political business cycle and opportunistic behaviour of politicians. The study by Portuguese authors Veiga and Veiga (2007) comes with a different approach. Authors of the study examine changes in municipal investment expenditures prior to elections.…”