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Money, politics and the post-war business cycle

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Author Info
Jon Faust
John Irons

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Abstract

While macroeconometricians continue to dispute the size, timing, and even the existence of effects of monetary policy, political economists often find large effects of political variables and often attribute the effects to manipulation of the Fed. Since the political econometricians often use smaller information sets and less elaborate approaches to identification than do macroeconometricians, their striking results could be the result of simultaneity and omitted variable biases. Alternatively, political whims may provide the instrument for exogenous policy changes that has been the Grail of the policy identification literature. In this paper, we lay out and apply a framework for distinguishing these possibilities. We find almost no support for the hypothesis that political effects on the macroeconomy operate through monetary policy and only weak evidence that political effects are significant at all.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 572.

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Date of creation: 1996
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Keywords: Business cycles ; Monetary policy ; Money;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  6. Frey, Bruno S & Schneider, Friedrich, 1978. "An Empirical Study of Politico-Economic Interaction in the United States," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 174-83, May. [Downloadable!] (restricted)
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  10. Eric M. Leeper, 1993. "Has the Romers' narrative approach identified monetary policy shocks," Working Paper 93-1, Federal Reserve Bank of Atlanta.
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  14. MacRae, C Duncan, 1977. "A Political Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 85(2), pages 239-63, April. [Downloadable!] (restricted)
  15. Lars Peter Hansen & Thomas J. Sargent, 1983. "Identification of continuous time rational expectations models from discrete time data," Staff Report 73, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  17. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August. [Downloadable!] (restricted)
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  19. Fair, Ray C, 1978. "The Effect of Economic Events on Votes for President," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 159-73, May. [Downloadable!] (restricted)
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  21. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," Working Paper 94-2, Federal Reserve Bank of Atlanta.
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  22. Haynes, Stephen E & Stone, Joe A, 1990. "Political Models of the Business Cycle Should Be Revived," Economic Inquiry, Oxford University Press, vol. 28(3), pages 442-65, July.
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    Other versions:
  24. Romer, Christina D. & Romer, David H., 1994. "Monetary policy matters," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 75-88, August. [Downloadable!] (restricted)
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  29. Friedlaender, Ann F, 1973. "Macro Policy Goals in the Postwar Period: A Study in Revealed Preference," The Quarterly Journal of Economics, MIT Press, vol. 87(1), pages 25-43, February. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Davide Debortoli & Ricardo Nunes, 2008. "The macroeconomic effect of external pressures on monetary policy," International Finance Discussion Papers 944, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Stefan Krause & Fabio Mendez, 2006. "Does Opportunism Pay Off? A Study of Vote Functions and Policy Preferences," Emory Economics 0604, Department of Economics, Emory University (Atlanta). [Downloadable!]
  3. Kevin Grier, 2008. "US presidential elections and real GDP growth, 1961–2004," Public Choice, Springer, vol. 135(3), pages 337-352, June. [Downloadable!] (restricted)
  4. S. Brock Blomberg & Gregory Hess, 2001. "Is the Political Business Cycle for Real?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  5. Adi Brender & Allan Drazen, 2005. "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Cross-Section of Countries," NBER Working Papers 11862, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Michael Funke & Jessica Zuo, 2003. "Annual Hard Frosts, Scale Effects and Economic Development: A Case not Closed," Quantitative Macroeconomics Working Papers 20308, Hamburg University, Department of Economics. [Downloadable!]
  7. Pettersson-Lidbom , Per, 2003. "Do Parties Matter for Fiscal Policy Choices? A Regression-Discontinuity Approach," Research Papers in Economics 2003:15, Stockholm University, Department of Economics. [Downloadable!]
  8. Pedro Santa-Clara & Rossen Valkanov, 2000. "Political Cycles and the Stock Market," University of California at Los Angeles, Anderson Graduate School of Management 1074, Anderson Graduate School of Management, UCLA. [Downloadable!]
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