Political Business Cycles at the Local Level in Japan: An Analysis using Prefectural Data

This paper aims to show that political business cycles occur at the local level in Japan. Political business cycles are theoretical models built to demonstrate that electoral cycles cause business booms, that is, governmental parties affect unemployment and inflation by manipulating macroeconomic policies for electoral purposes. Previous studies of such cycles using Japanese data have demonstrated that governmental parties implement expansionary macroeconomic policies during elections. However, they have not demonstrated that macroeconomic policies affect economic outcomes, namely unemployment and inflation, because they only focus on the political business cycles at the national level and do not focus on the local level. They have considered that monetary policies of macroeconomic policies at the national level affect the price level. However, recent studies discuss the “fiscal theory of the price level.” The theory is that government finance affects the price level; on the other hand, money supply does not affect the price level. In addition, local government finance in Japan has the major role: specifically, annual expenditure of local government is approximately sixty percent of the total, namely the sum of the national and local. However, few studies have focused on the political business cycles at the local level. Therefore, in this study, I will examine the causes of political business cycles at the local level to analyze Japanese prefectural data.