Political Cycles and Economic Policy in Israel: 1980-1999

Abstract

This paper presents an empirical examination of political cycles in Israel by examining the instruments of fiscal and monetary policy at the time of election campaigns. In common with the findings of similar empirical studies undertaken elsewhere, the economic data for Israel support the theory of politico-economic cyclicality. The results of the study indicate that in the 1980s and 1990s (a period that includes six general elections) about two years before an election the government adopted an expansionary policy which intensified as the election drew nearer: public civilian consumption rose significantly in the two years before an election, and especially in the last six months before an election. Similar findings are evident from an examination of the real wage per employee post in the public sector: this variable also rose significantly in the two years preceding an election, and in the 1980s it soared in the last six months before an election. In addition, the rate of expansion of public consumption and the real wage per employee post was negative in the six months after an election, although not markedly so. Contrary to economic theory and empirical findings worldwide which endorse it, in Israel we did not find a significant rise in transfer payments to the public (paid by the National Insurance Institute) before an election. With regard to monetary policy (as expressed in overdraft interest), there was an increase in the average nominal interest rate prior to an election, and a decline subsequently. In contrast with nominal interest, an examination of the ex post real interest rate does not indicate any specific trend at election time.