MODELLING OF THE POLITICAL BUDGET CYCLE AND THE IMPACT OF TRANSPARENCY

This paper models the political budget cycle with stochastic differential equations. The paper highlights the development of future volatility of the budget cycle. In fact, I confirm the proposition of a less volatile budget cycle in future. Moreover, I show that this trend is even amplified due to higher transparency. These findings are new evidence in the literature on electoral cycles. I calibrate a rigorous stochastic model on public deficit-to-GDP data for several countries from 1970 to 2012.