Prague Economic Papers 2016, 25(3):304-320 | DOI: 10.18267/j.pep.566

Political Business Cycle in the Czech Republic: Case of Municipalities

Michal Plaček1, Milan Půček2, František Ochrana3, Milan Křápek4, Lenka Matějová5
1 Faculty of Social Sciences, Charles University, Prague, Czech Republic (michalplacek@seznam.cz).
2 Faculty of Social Sciences, Charles University, Prague, Czech Republic (milan.pucek@seznam.cz).
3 Faculty of Social Sciences, Charles University, Prague, Czech Republic (ochrana@fsv.cuni.cz).
4 Private College of Economic Studies, Znojmo (krapek@svse.cz).
5 Faculty of Economics and Administration, Masaryk University, Brno, Czech Republic (175001@mail.muni.cz).

The study analyses expenditures of all municipalities of the Czech Republic over the period 2003-2013. It aims to examine whether changes in municipal spending get affected by the electoral cycle. The analysis has proven that expenditures of municipalities of the Czech Republic are influenced by the political cycle. However, the political business cycle has at the level of municipalities (compared to the macroeconomic level) its peculiarities. These arise mainly from limited options of municipal politicians to use economic instruments to win electoral votes in elections. To receive electoral votes, municipal politicians use mainly public investments and projects that are at the level of municipalities so apparent that they may influence voters in their electoral decision-making. Prior to elections, expenditures on investments significantly increase for all municipal size groups. For municipal size groups of over 50,000 residents, however, they are (per capita) higher compared to smaller municipal size groups. This may be explained by the fact that these municipalities have higher disposable resources (higher per capita own budgetary revenues, higher potential to acquire resources to co-finance municipal projects and broader portfolio of debt financing). Expenditures on transfers do not significantly change prior to municipal elections. We interpret this finding in a way that politicians prefer such investment projects that are ""visible"". Transfers are used to pay for certain current expenses for which municipalities may (in accordance with the established rules) apply through grants.

Keywords: transfers, political business cycle at the level of municipalities in the Czech Republic, political business cycle, investment expenditures
JEL classification: G14, H57

Published: January 1, 2016  Show citation

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Plaček, M., Půček, M., Ochrana, F., Křápek, M., & Matějová, L. (2016). Political Business Cycle in the Czech Republic: Case of Municipalities. Prague Economic Papers, 25(3), 304-320. doi: 10.18267/j.pep.566
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