Political Business Cycles in a Transitional Economy: The Case of Vietnam

Abstract

Political business cycles in democratic countries have been well established in literature. However, as far as it can be ascertained, there is no investigation as to whether political business cycles exist in a single party political system countries. Additionally, measuring the effect of political events on the economy in real sectors would prove extremely time-consuming. In financial market, the effects of any newsworthy events such as leadership election will be promptly reflected in security prices and, hence, in market indices.  Given the characteristic of financial market and to fill the literature gap, this study uses the Vietnamese equity index to estimate the autoregressive distributed lag model to determine if political business cycles exist in the Vietnamese transitional economy. Descriptive statistics and estimation results for an autoregressive distributed lag (ARDL) model strongly suggests that such cycles are present in the Vietnamese transitional economy over the period of October 15, 2015 through May 4, 2016. The results further indicate that the four-day lag of the Communist Party’s actions affect the equity market and hence real economic activities.