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Party Influence in Congress and the Economy

  • Snowberg, Erik
  • Wolfers, Justin
  • Zitzewitz, Eric

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 that track 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% 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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File URL: http://dx.doi.org/10.1561/100.00006060
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Article provided by now publishers in its journal Quarterly Journal of Political Science.

Volume (Year): 2 (2007)
Issue (Month): 3 (August)
Pages: 277-286

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Handle: RePEc:now:jlqjps:100.00006060
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  1. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting prediction market prices as probabilities," Working Paper Series 2006-11, Federal Reserve Bank of San Francisco.
  2. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
  3. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2006. "Partisan impacts on the economy: evidence from prediction markets and close elections," Working Paper Series 2006-08, Federal Reserve Bank of San Francisco.
  4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  5. Jayachandran, Seema, 2006. "The Jeffords Effect," Journal of Law and Economics, University of Chicago Press, vol. 49(2), pages 397-425, October.
  6. V. V. Chari & Larry E. Jones & Ramon Marimon, 1997. "The economics of split-ticket voting in representative democracies," Working Papers 582, Federal Reserve Bank of Minneapolis.
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