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Partisan conflict and private investment

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  • Azzimonti, Marina

Abstract

American politics have been characterized by a high degree of partisan conflict in recent years. Combined with a divided government, this has led not only to significant Congressional gridlock, but also to spells of high fiscal policy uncertainty. The unusually slow recovery from the Great Recession during the same period suggests the possibility that the two phenomena may be related. In this paper, I investigate the hypothesis that political discord depresses private investment. To this end, I construct a novel high-frequency indicator of partisan conflict. The partisan conflict index (PCI) uses a semantic search methodology to measure the frequency of newspaper articles reporting lawmakers’ disagreement about policy. I find a negative relationship between the PCI and aggregate investment in the US. Moreover, the decline is persistent, which may help explain the slow recovery observed since the 2007 recession ended. Partisan conflict is also associated with lower capital investment rates at the firm level, even when economic policy uncertainty and macroeconomic conditions are controlled for. I estimate that about 27% of the decline in corporate investment between 2007–2009 can be attributed to a rise in partisan conflict.

Suggested Citation

  • Azzimonti, Marina, 2018. "Partisan conflict and private investment," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 114-131.
  • Handle: RePEc:eee:moneco:v:93:y:2018:i:c:p:114-131
    DOI: 10.1016/j.jmoneco.2017.10.007
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    Cited by:

    1. Rangan Gupta & Chi Keung Marco Lau & Stephen M. Miller & Mark E. Wohar, 2017. "U.S. Fiscal Policy and Asset Prices: The Role of Partisan Conflict," Working papers 2017-10, University of Connecticut, Department of Economics.
    2. Thiem, Christopher, 2018. "Cross-category spillovers of economic policy uncertainty," Ruhr Economic Papers 744, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. repec:eee:jmacro:v:58:y:2018:i:c:p:78-90 is not listed on IDEAS
    4. MORIKAWA Masayuki, 2016. "How Uncertain Are Economic Policies? Evidence from a survey on Japanese firms," Policy Discussion Papers 16008, Research Institute of Economy, Trade and Industry (RIETI).
    5. repec:spr:sochwe:v:50:y:2018:i:4:d:10.1007_s00355-017-1098-9 is not listed on IDEAS
    6. Funke, Manuel & Schularick, Moritz & Trebesch, Christoph, 2016. "Going to extremes: Politics after financial crises, 1870–2014," European Economic Review, Elsevier, vol. 88(C), pages 227-260.
    7. Goodness C. Aye & Rangan Gupta, 2018. "Macroeconomic Uncertainty and the Comovement in Buying versus Renting in the United States," Working Papers 201832, University of Pretoria, Department of Economics.
    8. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1593-1636.
    9. repec:eee:ecofin:v:43:y:2018:i:c:p:87-96 is not listed on IDEAS
    10. Gupta, Rangan & Mwamba, John W. Muteba & Wohar, Mark E., 2018. "The role of partisan conflict in forecasting the U.S. equity premium: A nonparametric approach," Finance Research Letters, Elsevier, vol. 25(C), pages 131-136.
    11. Goodness C. Aye & Matthew W. Clance & Rangan Gupta, 2019. "The effectiveness of monetary and fiscal policy shocks on U.S. inequality: the role of uncertainty," Quality & Quantity: International Journal of Methodology, Springer, vol. 53(1), pages 283-295, January.
    12. Rangan Gupta & Chi Keung Marco Lau & Mark E. Wohar, 2016. "The Impact of US Uncertainty on the Euro Area in Good and Bad Times: Evidence from a Quantile Structural Vector Autoregressive Model," Working Papers 201681, University of Pretoria, Department of Economics.
    13. Cheng, Chak Hung Jack & Hankins, William B. & Chiu, Ching-Wai (Jeremy), 2016. "Does US partisan conflict matter for the Euro area?," Economics Letters, Elsevier, vol. 138(C), pages 64-67.
    14. repec:fip:fedlrv:00114 is not listed on IDEAS
    15. Bouoiyour, Jamal & Selmi, Refk & Wohar, Mark E., 2018. "Measuring the response of gold prices to uncertainty: An analysis beyond the mean," Economic Modelling, Elsevier, vol. 75(C), pages 105-116.
    16. Yong Jiang, 2018. "Does strategic commodities price respond to U.S. Partisan Conflict? Evidence from a parametric test of Granger causality in quantiles," Papers 1810.08396, arXiv.org.
    17. repec:eee:ecolet:v:158:y:2017:i:c:p:47-50 is not listed on IDEAS
    18. Morikawa, Masayuki, 2016. "How uncertain are economic policies? New evidence from a firm survey," Economic Analysis and Policy, Elsevier, vol. 52(C), pages 114-122.
    19. Bouton, Laurent & Lizzeri, Alessandro & Persico, Nicola, 2016. "The Political Economy of Debt and Entitlements," CEPR Discussion Papers 11459, C.E.P.R. Discussion Papers.
    20. Rangan Gupta & Christian Pierdzioch & Refk Selmi & Mark E. Wohar, 2017. "Does Partisan Conflict Predict a Reduction in US Stock Market (Realized) Volatility? Evidence from a Quantile-on-Quantile Regression Model," Working Papers 201744, University of Pretoria, Department of Economics.
    21. Lucas F. Husted & John H. Rogers & Bo Sun, 2017. "Monetary Policy Uncertainty," International Finance Discussion Papers 1215, Board of Governors of the Federal Reserve System (U.S.).
    22. Marina Azzimonti, 2016. "Does Partisan Conflict Deter FDI Inflows to the US?," NBER Working Papers 22336, National Bureau of Economic Research, Inc.
    23. Mehmet Balcilar & Seyi Saint Akadiri & Rangan Gupta & Stephen M. Miller, 2017. "Partisan Conflict and Income Distribution in the United States: A Nonparametric Causality-in-Quantiles Approach," Working Papers 201741, University of Pretoria, Department of Economics.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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