Ambiguity and Partisan Business Cycles

Authors: Maffioletti, Anna; Santoni, Michele

Source: FinanzArchiv: Public Finance Analysis, Volume 59, Number 3, September 2003 , pp. 387-406(20)

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Abstract:

We introduce ambiguity (Knightian uncertainty) into a stripped-down version of Alesina's (1987) partisan model of the business cycle. We show that, if the private sector's subjective expectations of future events are ambiguous, there is the possibility of a political business cycle, even when the parties running for the election have similar preferences for inflation and unemployment. In particular, if inflation is perceived as a loss, then the larger the fraction of the population that is ambiguity-prone (-averse), the larger is the postelection boom (slump), with unemployment then returning back to its natural level. We also show that, for given parties' preferences, ambiguity proneness (aversion) implies smaller (larger) fluctuations in the unemployment around its natural level when the right-wing party wins the elections.

Document Type: Research article

DOI: http://dx.doi.org/10.1628/0015221032973627

Publication date: 2003-09-01

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FinanzArchiv founded in 1884 is one of the world's oldest professional journals in public finance.

FinanzArchiv publishes original work from all fields of public economics which are of interest to an international readership, e.g. taxation, public debt, public goods, public choice, federalism, market failure, social policy, and the welfare state. Special emphasis is on high-quality theoretical and empirical papers on current policy issues.

FinanzArchiv is a well-established, internationally oriented journal in the field of public economics, widely read in Europe and all over the world.

FinanzArchiv is listed in the Social Science Citation Index (SSCI, JCR impact factor 2007 0,296), in Current Contents/Social and Behavioral Sciences, in IDEAS and RePEc (IDEAS/RePEc simple impact factor 2008 1.177), in the Journal of Economic Literature (CD and online), and in the International Bibliography of the Social Sciences.

FinanzArchiv is a fully peer-reviewed journal committed to a prompt turnaround of submissions. No more than four months should pass between online submission of a manuscript and the editor's decision on acceptance, revision, or rejection.
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Ambiguity and Partisan Business Cycles

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