Merrill: The Return of the Political Business Cycle

A few excerpts from a Merrill Lynch research note: Political Business Cycle (PBC) models were a hot topic in the 1980s. In the standard "opportunist" PBC model incumbent politicians have an incentive to stimulate the economy going into elections because the benefits-low unemployment-materialize quickly and the costs-high inflation-occur with a lag . ... After playing a small role in the business cycle in recent years, the political business cycle seems to be making a comeback. The double dose of tax cuts and spending increases at the start of this year marked the first major pro-cyclical......(read more)

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