Political Price Cycles in Regulated Industries: Theory and Evidence

Author/Editor:

Claudio A Paiva ; Rodrigo Moita

Publication Date:

November 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper develops a model of political regulation in which politicians set the regulated price in order to maximize electoral support by signaling to voters a pro-consumer behavior. Political incentives and welfare constraints interact in the model, yielding an equilibrium in which the real price in a regulated industry may fall in periods immediately preceding an election. The paper also provides empirical support for the theoretical model. Using quarterly data from 32 industrial and developing countries over 1978-2004, we find strong statistical and econometric evidence pointing toward the existence of electoral price cycles in gasoline markets.

Series:

Working Paper No. 2006/260

Subject:

Business cycles Fuel prices Gasoline Inflation Oil prices

English

Publication Date:

November 1, 2006

ISBN/ISSN:

9781451865202/1018-5941

Stock No:

WPIEA2006260

Pages:

22

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