The Political Business Cycles of EU Accession Countries

This paper considers whether political business cycles exist in Eastern European accession countries. Section I introduces the overall objectives of the work. Section II provides a short introduction to the political business cycle literature. It also considers the role of exchange rates, capital mobility, and central bank independence in restricting or encouraging political business cycles. Section III lays out the accession process to date as well as the exchange rate regimes accession states have used. Section IV tests empirically whether there have been political business cycles during the time period 1990 to 1999 for the 10 Eastern European accession countries, with estimations based on a Mundell-Fleming model. It finds that countries with flexible exchange rates have looser monetary policies in election years than in non-election years in countries with dependent central banks. If a country has a fixed exchange rate regime, it manipulates its economy in election years through running larger budgets instead of through looser monetary policy. Section V concludes with some policy implications for the European Union's enlargement process and EMU.