Political Theories of the Business Cycle

1
Political Theories of the Business Cycle

• Jac C. Heckelman
• Associate Professor of Economics
• Wake Forest University

2
Macroeconomic Formulations

• Lucas supply function
• Y YN a(Inflation Expected Inflation), agt0
• Phillips Curve representation
• U UN b(Inflation Expected Inflation), blt0

3
Political Business Cycles
Inflation
I2
I1
Unemployment
UN
UE
4
Political Business Cycles
Inflation
I2
I1
Unemployment
UN
UE
5
Political Business Cycles
Inflation
I3
I2
I1
Unemployment
UN
UE
6
Political Business Cycles
Inflation
I3
I2
I1
Unemployment
UN
UE
7
Political Business Cycles
Inflation
I2
I1
Unemployment
UN
UE
US
8
Political Business Cycles
Inflation
I2
I1
Unemployment
UN
UE
US
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Partisan Economic Performance
Democrat Democrat Republican Republican
D Unemployment D Unemployment D Inflation D Inflation D Unemployment D Unemployment D Inflation D Inflation
level level level level
60-64 -0.3 -5.5 -0.3 -20.0 68-72 2.0 55.6 -0.3 -6.4
64-68 -1.6 -30.8 3.5 291.7 72-76 2.1 37.5 0.4 9.1
76-80 -0.6 -7.8 7.6 158.3 80-84 0.4 5.6 -8.5 -68.5
92-96 -2.1 -28.0 0.4 13.8 84-88 -2.0 -26.7 0.5 12.8
96-00 -1.4 -26.4 0.1 4.1 88-92 2.0 36.4 -1.5 -34.1
00-04 1.5 38.4 -0.7 -21.4
Avg -1.2 -19.7 2.3 89.6 Avg 1.0 24.5 -1.7 -18.1
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Partisan Business Cycles
Inflation
Democrats
ID
Republicans
IR
Unemployment
UR
UD
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Rational Partisan Business Cycles
Inflation
ID
IE
IR
Unemployment
UR
UD
UN
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Rational Partisan Business Cycles
Inflation
ID
IE
IR
Unemployment
UR
UD
UN
13
RE Political Business Cycles
Inflation
I2
I1
Unemployment
UN
UE
US
14
RE Political Business Cycles
Inflation
IE
I1
Unemployment
UN
UE
15
RE Political Business Cycles
Inflation
IE
IX
Unemployment
UN
16
Electoral Policy Cycles
D
R
D
Infl
Defl
e
e
e
17
Electoral Policy Cycles
D
R
D
Infl
Defl
18
Electoral Business Cycles
D
R
D
Expan
Recess
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Electoral Business Cycles
D
R
D
Expan
N
Recess
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Electoral Business Cycles
D
R
D
Expan
N
Recess
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Evidence for Electoral Cycles

• Political Business Cycles
• Not for output or unemployment
• Policy cycles in money, deficits, some fiscal
• Partisan Business Cycles
• Mixed for output and unemployment
• Policy cycles in money and fiscal
• Historical record (pre WWII)
• Mixed for output
• Questionable for money

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Evidence for Partisan Business Cycles Truman
through Clinton

• Partisan Growth Cycles
• Democrats 4.1 gt Republicans 2.4
• Democrats 1st half 4.4 gt Republicans 1st half 1.4
• Democrats 2nd half 3.9 Republicans 2nd half 3.4
• But annual record does not fit
• Partisan Unemployment Cycles
• Democrats 5.2 lt Republicans 6.1
• Democrats 1st half 5.6 Republicans 1st half 5.8
• Democrats 2nd half 4.7 lt Republicans 2nd half 6.5

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Growth by term year
24
Unemployment by term year
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Political Monetary Cycle, 1875-1934
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A Political Business Cycle?
Y
e
e
e
T
27
(No Transcript)
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Strategic Election Timing

• PBC tests valid for US
• PPC tests valid for fiscal---money ?
• RPT valid for US
• RPT varies for others (VRPT)
• Uncertainty over election timing
• Greater divergence in output, unemployment over
  course of administration
• Election effects depend on when election called