Searching for political business cycles in Albania

It is widely believed in Albania as elsewhere, that governments may use the means they possess, including economic policy instruments, to enhance the chances of reelection. The government may engage in expansionary economic policies prior to elections, increasing output and decreasing unemployment, in order to please voters, creating this way Political Business Cycles (PBC). No research has been conducted previously on PBC in Albania, to best of our knowledge.
The objective of this study is to search for the existence of PBC in Albania. The testing for a PBC is done by analyzing the
economic policy instrument and macroeconomic outcomes. We assume that the government may follow expansionary
fiscal and monetary policy to reduce unemployment and increase output before/during elections, and as a result of this expansionary economic policy, the inflation may increase during/after elections. We analyzed data for the variables abovementioned at monthly or quarterly level, between January, 1998 and March, 2007. The period prior to 1998 was not taken into consideration because of the lack of reliable data and because the economic, political and institutional framework followed a chaotic and abnormal pattern between early 1990’ and 1997. The 1996 general (parliamentary) elections were characterized by fraud while the early general 1997 elections followed the massive social, economic and political unrest (Gërxhani and Schram, 2004). There were two parliamentary elections taking place during the analyzed period, namely the 24th of June 2001 and 3rd of July 2005 and three local elections, namely the 1st of October 2000, 12th of October 2003 and 18th of February 2007. The local elections have also been included in this study because they were seen as a test for the participating political forces and as a confidence “referendum” for the central government. It is essential to analyze both policy instruments and macroeconomic outcomes, as it is possible having obvious attempts by the incumbent to manipulate the economy through significantly altering fiscal and monetary policy instruments, but without succeeding to significantly affect the intended macroeconomic outcomes (i.e. output, unemployment, inflation etc.) due to various reasons. Business
Cycles may occur and coincide in election timing, however not necessarily caused by opportunistic economic policies, rather
than other factors, such as expectations (Suzuki, 1992). In addition, there may be other cyclical phenomena that may offset the effect of policy instruments on economic outcomes. Therefore, we analyzed in this research work both types of
economic instruments (fiscal and monetary) and related macroeconomic outcomes.