A political business cycle is a shift in economic markets mediated by politicians. Such changes are commonly linked with elections, where incumbents may promote particular policies to advance their causes. In the wake of the election, the officials elected to office may enact changes to economic and monetary policies in alignment with their campaign goals, or to strengthen the economy to create a positive view of their administrations. The net result can be a form of boom and bust cycle tied with elections.
This is just one among many economic theories developed to explain market behaviors and the ways in which the market can shift. Not all economists subscribe to the idea of the political business cycle, and those that do may have varying views on the phenomenon. Research demonstrates that market changes do tend to occur in conjunction with elections, but this could be due to causes other than political manipulation. Investors and other participants tend to get nervous during periods of political change, for example, and this could contribute to market trends.
Under the political business cycle theory, as incumbents prepare for an election, they may liberalize economic policy to increase the money supply and flow of credit. The idea behind this is to keep constituents happy and to increase feelings of contentment and economic security. Incumbents can stress this in their campaign materials to suggest that constituents should vote for them to keep the economy strong and productive. Some of these changes can actually contribute to economic problems in the future, but incumbents bank on the short term satisfaction of voters to meet their goals.
After an election, politicians elected into office may make some policy changes, for a variety of reasons. In a dramatic election where a different party takes power, these changes can be significant, as many leading political parties have very differing views on monetary and economic policy. Elected officials may also be worried about problems in the future, and could make some conservative policy decisions with the goal of promoting long term market stability. This can create a ripple effect that leads to changes in economic conditions and creates a political business cycle.
Economists can monitor economic activity and may be able to link specific incidents on a timeline. In a political business cycle, economists might expect to see some economic growth right before an election as a result of liberalized policies, followed by a period of contraction as new officials take office, or reelected incumbents readjust their old policy to limit inflation. Analysis of economic conditions can include speculation on the factors that may have caused them, from investor panic about a change of power to policy changes.