Political credit cycles

Abstract

This paper tests the existence of political credit cycles, the positive comovement between credit and elections. While several single-country studies point to the existence of this relationship, the link between electoral cycles and credit expansion has seen little exploration at the multicountry level. Using a comprehensive dataset covering bank and non-bank credit in 165 countries from 1960 to 2013, we show that both government and private credit significantly increase in election years. This finding suggests the possibility that politicians use not only fiscal and monetary policy to court voters, but also implement credit policies such as interest rate subsidies and tax breaks for debt to enhance credit growth. We also find that a higher degree of financial openness weakens the frequency and magnitude of political credit cycles; yet, the conditional effect of financial openness is stronger for developing countries than developed economies.