Elections, party politics and economic policy

Sammanfattning: This thesis consists of three papers on elections, party politics and economic policy.Do Parties Matter for Fiscal Policy Choices addresses the question whether parties matter for fiscal policy, i.e., government spending and the level of taxes. It is part of conventional wisdom that left-wing parties spend and tax more than right-wing parties. However, very few convincing empirical studies show this to be the case. I argue that the lack of robust findings might reflect either the data sets used, or the methodology employed. By using a very large cross-section and time-series data set from Swedish local governments, N=274 and T=21, I avoid many of the difficulties with cross-country comparisons. I find significant and sizeable partisan effects: left-wing parties indeed spend and tax more than right-wing parties. These effects are particularly large when the same party has had a long tenure in office. On average, left-wing parties have 13 percent higher real spending per capita and 7 percent higher income taxes than right-wing parties. I also show that ignoring parameter heterogeneity could lead to biased or meaningless estimates of partisanship effects. In particular, these pitfalls might apply to research based on the use of OLS or FGLS estimators.An Empirical Investigation of Strategic Use of Debt investigates whether strategic considerations influence debt policy. The idea is that the stock of debt links past policies to future policies, as an incumbent policymaker can affect the state of the world inherited by his successors. Specifically, an incumbent anticipating a possible defeat in the next election can use debt strategically in order to influence the policy of its successor. This paper examines the accumulation of debt by Swedish local governments. I find that right-wing governments accumulate more debt when facing a higher probability of defeat, whereas the case is the opposite for left-wing governments. These effects are sizeable: a right-wing government increases its level of debt by 15 percent while a left-wing government decreases its debt by 11 percent, if they are both certain of being replaced as opposed to being certain of staying in office. The results are consistent with the predictions from the strategic debt model developed by Persson and Svensson (1989).A test of the Rational Electoral-Cycle Hypothesis explores the general idea of incumbent governments trying to manipulate fiscal policies before elections to enhance their prospects for re-election. Despite ample anecdotal evidence of political opportunism, little systematic evidence supports this hypothesis. In this paper, I take a fresh look at the empirical relevance of the electoral-cycle hypothesis by using a data set from Swedish local governments. This new panel data set gives me several advantages over previous studies, chiefly that I have 2000 observations from election periods and that the election schedule is fixed. The main finding is a significant and non-negligible electoral cycle in both spending and taxes. On average, spending is 1.5 percent higher and taxes 0.4 percent lower in election years than in off-election years. Moreover, the electoral cycle in spending or taxes is absent when an incumbent is ousted from office. These findings are consistent with an electoral-cycle model, which emphasizes the role of elections in selecting the most competent politician, such as Rogoff and Sibert (1988), Rogoff (1990) and Persson and Tabellini (2000).