i want to know the empirical relationship between govt policy (spending and taxation) and elections.
One question is: do politicians myopically increase spending and lower taxes in the lead up to an election year? in a regression setup, we can estimate the following model:
Y_it=fixed effect(i)+timedumy(t)+eps
in the philippines, election years are fixed, and therefore perfectly collinear with the year in which they are held. So can cannot seperately estimate this model:
Y_it=fixed effect(i)+timedumy(t)+ElectionYeardummies(t)+eps
as the time and electionyeardummy would be exactly collinear in the year of the elections.
in what sense is this a problem? i cant separate year shocks and elections. although, time varying factors like GDP may help us here.
there is a study in india that looks at this question. in india, elections and the year dummies are not perfectly correlated, coz states can have elections when they want. These are called midterm elections. the fact that it is whenever they want, implies endogeneity between the timing of actual elections and the shocks that cause states to hold midterm elections.
the author (stuti) solves by using scheduled elections (vs. actually elections). scheduled elections are an IV coz its correlated with actual elections, and its uncorrelated with shocks that coincide with the election year (and induce a midterm election).
work in the philippine case doesn’t have endogeneity, in stuti’s sense, but there is an identification problem.
i’d be more confident about this if we had enough election years. in theory, we have: ‘92, 95, 98 2001 04 07 (as yet uncollected, but theoretically available), so we have 6 elections. i think this is enough to counter the criticism that we can’t separate year shocks from election effects, coz what are the chances that all the election year dummies are significantly different from other years just coz of some cyclical shock that just happens to correspond the the election cycle? very low indeed.
we need fiscal data from 84 to 2006 to use all 6 elections. We also need province-time level variation. in the philippines, its very hard to get time series of provincial level variables for 20 years. the main source of provincial data is fies, and apis. i don’t think there is data for either prior to the late 90s, or even apis and fies are available. but lets see…
Posted by outinfour 