Political budget cycles in Latin America: fiscal policy effectiveness or regulated markets?

Within the Political Budget Cycle theory (PBC), it is well known that reelection-seeking incumbents have incentives to manipulate economic outcomes through fiscal policy. However, there is no research to asses the conditions under which manipulating taxes and spending effectively serve those interests of political survival. In our first chapter, we argue that the incentives to do so will depend on the extent to which output can be effectively affected in the short-run. Our theory suggests that politicians follow such strategy with different degrees of information, and shows why some incumbent presidents have been more successful in manipulating the fiscal policy than others using a sample of 13 Latin American countries between 1980 and 2005. Our second chapter estimates the macroeconomic effects of exogenous fiscal policy shocks with a three variable Structural Vector Autoregression (SVAR) model. Our sample country is Costa Rica, for which there is no literature on the topic. Using quarterly data from 1991 until 2009, we found a negative and small impact of fiscal policy on output, while a small positive of revenue. Based on these results, we decided to test the existence of an indirect tool the incumbent may still have through the regulated price industries. Our theory suggests that a regulator-agency will choose the price which maximizes the political support for the incumbent government-regulator. We provide evidence with monthly data from 1986 until 2014, from a wider regulated market: Costa Rica. We also provide insights on the effect of elections on gasoline prices (as a proxy for regulated markets) for a a panel of ten Latin American countries of annual data from 2001-2012. And we contribute to the literature by proposing a non parametric approach describing the relationship between prices in regulated markets and election timing