Estimating the Political Business Cycles (Case Study of Iran: 1978-2016)

Political business cycle theory investigates the interaction between voters and the government. According to this theory, economic factors have significant influence on voters’ behavior. Hence, governments try to adopt different economic policies to meet voters’ satisfaction. This paper attempts to estimate an ARMA model for political business cycles in Iran during the period of 1978-2016. The results indicate that inflation fluctuates during the elections. Inflation drops in the election year and rises in the post-election periods. In addition, the budget deficit increases and capital investment decreases over the pre-election periods. The ARMA model was insignificant for post-election periods. The results of the monetary variables (liquidity and net government debt to the central bank) show that the behavior of these variables confirms the existence of a political business cycle. In election years and the pre-election year relative to other years, net government debt to the central bank increases by 3% on average. This results in higher liquidity in the next period. Finally the unemployment rate is not influenced by the political business cycle.