Working Paper: NBER ID: w12751
Authors: Erik Snowberg; Justin Wolfers; Eric Zitzewitz
Abstract: To understand the extent to which partisan majorities in Congress influence economic policy, we compare financial market responses in recent midterm elections to Presidential elections. We use prediction markets tracking election outcomes as a means of precisely timing and calibrating the arrival of news, allowing substantially more precise estimates than a traditional event study methodology. We find that equity values, oil prices, and Treasury yields are slightly higher with Republican majorities in Congress, and that a switch in the majority party in a chamber of Congress has an impact that is only 10-30 percent of that of the Presidency. We also find evidence inconsistent with the popular view that divided government is better for equities, finding instead that equity valuations increase monotonically, albeit slightly, with the degree of Republican control.
Keywords: No keywords provided
JEL Codes: D72; G13; G14; H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Partisan majorities in Congress (D72) | economic policy outcomes (F68) |
| Republican majorities in Congress (D72) | equity values, oil prices, and treasury yields (G12) |
| Switch in majority party in Congress (D72) | economic impact (F69) |
| Divided government (D72) | equity markets (G10) |
| Degree of Republican control (D72) | equity valuations (G12) |
| Changes in congressional majorities (D72) | financial market reactions (G19) |