Estimating the Effect of Parliamentary Elections on Primary Budget Deficits in OECD Countries

Using an unbalanced panel of OECD countries the paper empirically tests the political budget cycle hypothesis. The econometric approach is based on the equation proposed by Bohn (1998) for testing the sustainability of fiscal policy and system GMM estimators. The empirical results strongly support the hypothesis of smaller primary surpluses (only) in election years. The result found in a previous study that an election effect exists only in new democracies is rejected. However, in contrast to the political budget cycle hypothesis, it is argued that the result may rather be explained by governments’ attempt to avoid intra-governmental conflicts on limited budgetary funds during election years, since this may be interpreted as an adverse signal by the voters. Besides, the results indicate only a temporary effect of the European Monetary Union.