Political Business Cycles in Taiwan Local Fiscal Budget: An Estimation and Comparison between Fixed Effect and Random Effect Models





Published date: 

December, 2006


Ding-Ming Wang
Fu-Yao Chan


The incumbents in a democracy tend to manipulate the economy by adopting expansionary fiscal policy to stimulate short-run expansion during electoral periods. By doing so, the macroeconomic performance is affected by the election and it is so called the political business cycle. In order to test whether policy instruments are affected by the election or not, this paper focuses on the electoral and partisan cycles in local budgets in Taiwan Province between 1988 and 2003. More specifically, we try to explore the scenario of political business cycle at local governments.

The result shows that local governments’ annual budgets do expand during the electoral years, which is corresponding to the theory of opportunistic political business cycle. On the other hand, we do not find the evidence to support the partisan political business cycle theory, since different incumbent parties have similar decision making for their budget during elections. Furthermore, we find a significant lag impact on the current budget setting. Finally, the empirical result reveals that local governments’ budgets and expenditures expand during James Soong as a Chairman and Governor of Taiwan Provincial Government.