Working Paper: NBER ID: w1940
Authors: Alberto Alesina; Jeffrey Sachs
Abstract: This paper tests the existence and the extent of a politically induced business cycle in the U.S. in the post-World War II period. The cycle described in this paper is different from the traditional "political business cycle" of Nordhaus. It is based on a systematic difference between the monetary policies of the two parties in a model with labor contracts. From an explicit optimization problem we derive a system of equations for output and money growth. Then we successfully test the non-linear restriction imposed by the theory on the parameters of the system of equations. We cannot reject the hypothesis that money growth has been systematically different under the two types of administration and that this difference contributes to explain output fluctuations.
Keywords: Political Business Cycle; Monetary Policy; Partisan Theory
JEL Codes: E32; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Democratic administrations (P16) | higher money growth (O42) |
| Democratic administrations (P16) | output expansion (E23) |
| Republican administrations (E65) | lower money growth (E49) |
| Republican administrations (E65) | focus on controlling inflation (E64) |
| Republican administrations (E65) | recessions in the first half of their terms (E65) |
| Differences in monetary policy (E49) | fluctuations in output (E32) |
| First Nixon administration (I00) | behaves differently (C92) |
| Democratic administrations (P16) | no recessions at the start of their terms (E65) |
| Republican administrations (E65) | higher likelihood of recessions shortly after election (E65) |