Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during election day. Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
5591.
Find related papers by JEL classification: D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies H6 - Public Economics - - National Budget, Deficit, and Debt
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Boutchkov, Maria & Doshi, Hitesh & Durnev, Art & Molchanov, Alexander, 2008.
"Politics and Volatility,"
CEI Working Paper Series
2008-10, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
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