The Review of Economics and Statistics VOL.CII JULY 2020 NUMBER 3 VOTE BUYING OR (POLITICAL) BUSINESS (CYCLES) AS USUAL? Toke Aidt, Zareh Asatryan, Lusine Badalyan, and Friedrich Heinemann* Abstract—We report robust evidence of a new short-run monetary election and middle-income countries for the years 1975 to 2015. We cycle: the monthly growth rate of the money supply (M1) around elections estimate a dynamic short-run money demand function. Our is higher than in other months in a sample of low- and middle-income coun- tries. We hypothesize this is related to systemic vote buying. Consistent with baseline specification is a dynamic panel model with year, this, we find no cycle in authoritarian countries and countries with strong month, and country fixed effects. In a more demanding spec- political institutions and a pronounced cycle in elections where interna- ification, we include interactions between these fixed effects tional election monitors reported vote buying or in close elections. Using survey data on daily consumer expenditures, we show that within-household and thus identify the effect of elections on the growth rate of consumption of food increases in the days before elections. M1 by testing if, within an election year, its growth rate is higher during the month of an election, after removing com- mon shocks that happen within a month in a given year and I. Introduction country-specific seasonality. We find evidence of an increase in the growth rate of M1 in election and postelection months HE theory of political business cycles in monetary ag- in these countries. The effect is sizable: the growth rate of M1 Tgregates, pioneered by Nordhaus (1975) and MacRae increases on average by between 0.41 and 0.61 percentage (1977) and given its modern, rational choice interpretation by points, or about 1/13th of a standard deviation in election Persson and Tabellini (1990), predicts monetary expansions months. We are unable to find similar effects among estab- in the quarters leading up to an election and an election-time lished OECD democracies. These results are remarkably ro- economic boom. The ultimate goal is to help the incumbent bust and suggest that the election calendar induces concur- government win votes. But empirical tests of this theory have rent fluctuations in M1 that can be detected only by studying fared badly, and the evidence on monetary political cycles high-frequency (monthly) data. The evidence on this mone- of the classical Nordhaus-MacRae type is weak, as pointed tary expansion in the election month in non-OECD countries out in surveys by Paldam (1997) and Drazen (2001). We with elections, which we refer to as the election date effect, provide new evidence on the monetary effects of elections is new to the literature, and robustly establishing this new and strive to offer an alternative perspective on the money- stylized fact is a main contribution of the paper. election nexus. In contrast to past work on monetary political To explain the election date effect, we propose the vote- cycles that emphasizes deliberate manipulations of monetary buying hypothesis according to which the effect is a mani- policy instruments by the central bank in the quarters prior festation of systemic vote buying. Vote buying—understood to elections, we argue that the effect is concurrent with elec- as payments in exchange for voting in a particular way or for tions and works through money demand rather than through showing up to vote—requires significant amounts of cash to supply-side interventions by the central bank. be disbursed right before the election is held. This increases We investigate if the growth rate of the monetary aggregate the demand for money and affects (recorded) M1 around elec- M1—defined as the total amount of cash in circulation plus tions. The resources needed to buy votes may be obtained by transferable deposits held by all money-holding sectors— converting illiquid into liquid assets. This substitution from increases in election months in a panel of up to 104 low- broad money into cash or deposits directly increases M1. Vote buying is an illegal activity, and the funds may come Received for publication May 12, 2017. Revision accepted for publication from the shadow economy. Once such shadow economy cash November 16, 2018. Editor: Rohini Pande. ∗ hoardings are used to buy votes, a fraction of them turns into Aidt: University of Cambridge and CESifo, Munich; Asatryan: ZEW deposits in banks, which increases banks’ ability to lend and Mannheim; Badalyan: University of Giessen; Heinemann: ZEW Mannheim and University of Heidelberg. offer leeway for an increase in M1. Finally, if overseas funds We thank Bagrat Asatryan, Vardan Baghdasaryan, Niclas Berggren, Frank are converted to local currency to fund vote buying, then this Bohn, Oana Borcan, Adi Brender, Vasco Calvalho, Axel Dreher, Jac Heck- will, in fixed or managed exchange rate systems, increase M1. elman, Philip Keefer, Ruben Ruiz Rufino, Arne Steinkraus, Thomas Strat- mann, Kaj Thomsson, Francisco Veiga, Ekaterina Zhuravskaya, and various In all cases, the result is an increase in M1 centered around seminar participants, as well as Rohini Pande (the editor) and two anony- elections. mous referees for valuable comments. We thank Annika Havlik and Colja We offer four pieces of evidence that vote buying is a pos- Maser for excellent research assistance. A supplemental appendix is available online at http://www.mitpress sible explanation for the election date effect, but a conclusive journals.org/doi/suppl/10.1162/rest_a_00820. case cannot be made. First, vote buying, as a viable electoral The Review of Economics and Statistics, July 2020, 102(3): 409–425 © 2019 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology https://doi.org/10.1162/rest_a_00820 Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/rest_a_00820 by guest on 03 October 2021 410 THE REVIEW OF ECONOMICS AND STATISTICS strategy, requires weak democratic institutions, poorly con- toral activities to observable anomalies timed around elec- ducted elections, and an electorate willing to “sell” their tions. Kapur and Vaishnav (2013) show that Indian construc- votes. By drawing on data from hundreds of reports from tion firms divert short-term funds to political campaigns (in international election monitors (Kelley, 2012), we test this anticipation of postelectoral preferential treatment) and that implication. Consistent with the vote-buying hypothesis, we this induces a short-term election cycle in cement consump- find that the increase in the growth rate of M1 is system- tion in the election and postelection month. The macroeco- atically larger in elections that according to international nomic effect on M1 that we find is also concentrated in the election monitors were far from “free and fair” or were rid- election and postelection month. Sukhtankar (2012) finds ev- dled with electoral fraud and vote buying. In particular, we idence of an election cycle in the prices paid by sugar mills cannot find evidence of an election date effect in elections in India. This is consistent with illegal campaign funding ac- that were reported by the monitors to be free and fair. Sec- tivities, and such activities could, in principle, fund vote buy- ond, large-scale vote buying does not usually occur in coun- ing (as well as other election expenses). Finally, Mitra et al. tries with consolidated authoritarian political institutions (2017) study consumption data from across Indian states and where the elections are heavily controlled by the incumbent identify anomalies in consumption patterns that are consis- government, eliminating the need to buy votes or, con- tent with vote buying. Our work relates directly to this by versely, in countries with strong democratic institutions, showing similar evidence from Armenia.1 where checks and balances make large-scale vote buying im- The rest of the paper is organized as follows. Section II possible. Consistent with this line of reasoning, we find that introduces our data, identification strategy, and the main re- the election date effect exhibits an inverse U-shaped relation sults. Section III discusses evidence on the monetary mecha- with indicators on the quality of a country’s political institu- nisms behind the election date effect. Section IV introduces tions: the election date effect is statistically significant only the vote-buying hypothesis and presents evidence consistent for countries in between the two extremes. Third, we also with it. Section V concludes. The supplementary material find evidence that the election date effect is largest in close contains extra estimation results, case study evidence, and a elections during which competition among candidates is in- simple model of the money market that illustrates the possible tense and vote buying of greatest value. Fourth, vote buying links between vote buying and M1. can affect M1 by funding extra consumption. This happens, for example, if the cash used to buy votes was hoarded in the black economy and returns to the banking system when II. A New Monetary Election Cycle voters spend it. To provide evidence on this mechanism, we Existing models of political business cycles in monetary undertake a microeconometric study of anomalies in house- aggregates emphasize that politicians who seek reelection hold consumption around elections in Armenia. Armenia ex- will employ monetary instruments to generate a favorable hibits a marked increase of currency in circulation in the days economic environment prior to an election.2 Accordingly, around the elections it has held since 2003, and reports from any monetary expansion must start well before the election international election monitors and in the local press are full date to have the desired effect on the real economy. Both of anecdotal evidence of vote buying on a massive scale. Us- conceptually and empirically, the relevance of such monetary ing daily household-level consumption diaries from a large policy cycles remains contested (Drazen, 2001).