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

  • Alberto Alesina
  • Jeffrey Sachs

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://www.nber.org/papers/w1940.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1940.

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Date of creation: May 1986
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Publication status: published as Alesina, Alberto and Jeffrey Sachs, "Political Parties and the Business Cycle in the United States, 1948-1984." Journal of Money Credit and Banking, Vol. 20, No. 1, February 1988, pp. 63-82.
Handle: RePEc:nbr:nberwo:1940
Note: EFG
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  1. 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.
  2. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  3. Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-80, August.
  4. 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.
  5. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  6. 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.
  7. Stigler, George J, 1973. "General Economic Conditions and National Elections," American Economic Review, American Economic Association, vol. 63(2), pages 160-67, May.
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