Applying Political Business Cycle to Explain Macroeconomic Policies in Iran: A Public Choice Perspective

Abstract

Public choice theorists evaluate the government's behavior within the framework of political business cycles. Considering the significant role of macroeconomic factors such as inflation and unemployment in voters' behavior, governments with politically beneficial behaviors seek to increase voter satisfaction and the probability of their re-election through adopting economic policies. Thus, the long-term welfare of the current and future generations will be sacrificed to governments' short-term beneficial policies. This study analyzed the political business cycles within the framework of the Nordhaus (1975) approach by using the optimal control method and maximizing the social voting function. The results indicated that the election-winning government increases the unemployment rate to control inflation. However, by approaching the next election period, the elected government reduces the unemployment rate close to the point corresponding to short-term policy, resulting in increasing the inflation again. In the long-term, the policymaker selects a policy with lower unemployment and higher inflation with respect to the optimal point.