Political business cycles in EU accession countries

Abstract:

This paper considers whether political business cycles existed in East European accession countries during the period 1990-9. Based on the Mundell-Fleming model expanded in Clark and Hallerberg (2000), we argue that the type of exchange rate regime and the relative independence of the central bank affects the instruments governments use to influence the economy before elections. In our empirical analysis, we find that accession countries with dependent central banks and flexible exchange rates have looser monetary policies in electoral periods than in non-electoral periods. If a country has a fixed exchange rate regime, it manipulates its economy in election years through running larger budgets instead of through looser monetary policy. The presence of such cycles in Eastern Europe has implications for the introduction of the euro in EU accession countries.