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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12751.
Length: Date of creation: Dec 2006 Date of revision: Handle: RePEc:nbr:nberwo:12751
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Find related papers by JEL classification: D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies H0 - Public Economics - - General
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