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Political Parties and the Business Cycle in the United States, 1948-1984

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  • Sachs, Jeffrey
  • Alesina, Alberto
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    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.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/4553026/alesina_politicalparties1948.pdf
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    Bibliographic Info

    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 4553026.

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    Date of creation: 1988
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    Publication status: Published in Journal of Money, Credit and Banking
    Handle: RePEc:hrv:faseco:4553026

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    1. Barro, Robert J., 1978. "Unanticipated Money, Output, and the Price Level in the United States," Scholarly Articles 3450988, Harvard University Department of Economics.
    2. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    3. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    4. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
    5. Allen, Stuart D, 1986. "The Federal Reserve and the Electoral Cycle: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 88-94, February.
    6. Abrams, Richard K & Froyen, Richard & Waud, Roger N, 1980. "Monetary Policy Reaction Functions, Consistent Expectations, and the Burns Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(1), pages 30-42, February.
    7. Weintraub, Robert E., 1978. "Congressional supervision of monetary policy," Journal of Monetary Economics, Elsevier, vol. 4(2), pages 341-362, April.
    8. Chappell, Henry W, Jr & Keech, William R, 1986. "Party Differences in Macroeconomic Policies and Outcomes," American Economic Review, American Economic Association, vol. 76(2), pages 71-74, May.
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