Public Sector Price Controls and Electoral Cycles

Abstract

Public enterprise prices are important policy instruments in developing economics. This is why public sector price polices constitute a key element of stabilization programmes implemented in these economies. However, this significance is not specific to stabilization episodes. First, this study questions whether an opportunistic politician can manipulate public prices to win elections. It analyses the impact of such price controls on budget deficits and the repercussions of alternative financing mechanisms of these deficits on the inflation rate and voters' behaviour. It is shown that electoral inflation cycles are obtained under domestic debt financing, whereas money financing does not permit such a manipulative policy. Second, by focusing on data of the Turkish economy for the 1987(1)-2003(12) period, empirical evidence for such manipulative policies is given.