Unconstrained by a Constitutional Balanced Budget Constraint

Rationality and Biases in an Electoral Forecast Cycle Model

Empirical evidence suggests that governments try to increase their re-election chances by using overly optimistic revenue forecasts. In a model, three results obtain. First, governments try to appear more competent by increasing deficit-financed spending just as in a political budget cycle model, thereby circumventing a state-level constitutional balanced budget constraint. Second, some results change, if we question that beliefs of informed and uninformed voters coincide ex post. Third, as previously suspected, the cycle becomes particularly virulent, if the government correctly anticipates a recession; opportunism produces, unintentionally, countercyclical policies.