Question

Discuss why and how politicians create opportunistic political business cycles ahead of elections. (not less than 1000 words)

Answer 1

As we know that, the political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. We know that when a new government is appointed in any country, the government first of all tries to find out the solution of most urgent problems of the conutry. The new govt. Makes important changes in the administration, to look into the day to day matters of the state. We know that, when any political party came in power after winning election than it also chooses important ministers for different departments. Like minister of finance, health, education etc.

The government after coming in power also do the hard to control the inflation in the country. Inflation as we know is the continues increase in the general price level in the economy. The rising inflation severely impacts the econnomy. The govt. first of all create a political business cycle. The political business cycle has the same phases as are of normal business cycle, for about which we are familiar.Political processes affect the real economy. An important channel through which politics affects economics is uncertainty. It has been observed that political uncertainty is high around national elections and negatively affects corporate investments and foreign capital inflows. If national elections affect corporations and foreign investors, we should expect them to also affect entrepreneurial finance provided by investors like venture capitalists (VCs). To add to that, in a complex federal democracy, state level politics is a significant source of political uncertainty. This is the first paper to examine the impact of national and state elections on entrepreneurial finance and provides a framework of venture capitals nvestment behavior in the face of political uncertainty. We find that venture capitals investments decrease significantly due to political uncertainty around national and state elections. Venture capitals respond strongly to national elections by decreasing the total investment value and the number of deals in election years. However, they give a softer response to regional political uncertainty around state elections by decreasing only the average deal size. The findings have important implications for governments, regulators and policymakers, and open up an opportunity to examine a variety of new questions which can provide a more detailed and nuanced understanding of the impact of elections on venture capitals investments.

The political business cycle are introduced by Michael Kalecki in 1943. He holds the view that individual political Interest influenced overall economic growth in the country. The politicians have the political objectives,which they fullfil ahead of the elections. The politicians are always looking for the possible solutions to the problems faced by the country ahead of elections. The political business cycle created by politicians ahead of elections are always striving for betterment of the country. The recession , expansion,tough ,peak is monitored and the possible solutions to recession are the chief motive of politicians ahead of elections.

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