Political Theories of the Political Theories of the Business CycleBusiness Cycle
Jac C. HeckelmanJac C. Heckelman
Associate Professor of EconomicsAssociate Professor of Economics
Wake Forest UniversityWake Forest University
Macroeconomic Formulations
• Lucas supply functionY = YN + a*(Inflation – Expected Inflation), a>0
• Phillips Curve representationU = UN + b*(Inflation – Expected Inflation), b<0
Political Business Cycles
Unemployment
Inflation
UN
I2
UE
I1
Political Business Cycles
Unemployment
Inflation
UN
I2
UE
I1
Political Business Cycles
Unemployment
Inflation
UN
I3
I2
UE
I1
Political Business Cycles
Unemployment
Inflation
UN
I3
I2
UE
I1
Political Business Cycles
Unemployment
Inflation
UN
I2
UE
I1
US
Political Business Cycles
Unemployment
Inflation
UN
I2
UE
I1
US
Partisan Economic PerformanceDemocrat Republican
Unemployment Inflation Unemployment Inflation
level % level % level % level %
60-64 -0.3 -5.5 -0.3 -20.0 68-72 2.0 55.6 -0.3 -6.4
64-68 -1.6 -30.8 3.5 291.7 72-76 2.1 37.5 0.4 9.1
76-80 -0.6 -7.8 7.6 158.3 80-84 0.4 5.6 -8.5 -68.5
92-96 -2.1 -28.0 0.4 13.8 84-88 -2.0 -26.7 0.5 12.8
96-00 -1.4 -26.4 0.1 4.1 88-92 2.0 36.4 -1.5 -34.1
00-04 1.5 38.4 -0.7 -21.4
Avg -1.2 -19.7 2.3 89.6 Avg 1.0 24.5 -1.7 -18.1
Partisan Business Cycles
Unemployment
Inflation
Democrats
Republicans
UR
IR
UD
ID
Rational Partisan Business Cycles
Unemployment
Inflation
UR
IR
UD
ID
UN
IE
Rational Partisan Business Cycles
Unemployment
Inflation
UR
IR
UD
ID
UN
IE
RE Political Business Cycles
Unemployment
Inflation
UN
I2
UE
I1
US
RE Political Business Cycles
Unemployment
Inflation
UN
I1
UE
IE
RE Political Business Cycles
Unemployment
Inflation
UN
IE
IX
D D R
Defl
Infl
e ee
Electoral Policy Cycles
D D RElectoral Policy Cycles
Infl
Defl
D D R
Recess
Expan
Electoral Business Cycles
D D R
Electoral Business Cycles
N*
Expan
Recess
D D R
Electoral Business Cycles
Recess
Expan
N*
Evidence for Electoral Cycles• Political Business Cycles
– Not for output or unemployment– Policy cycles in money, deficits, some fiscal
• Partisan Business Cycles– Mixed for output and unemployment– Policy cycles in money and fiscal
• Historical record (pre WWII)– Mixed for output– Questionable for money
Evidence for Partisan Business Cycles Truman through Clinton
• Partisan Growth Cycles – Democrats 4.1 > Republicans 2.4
• Democrats 1st half 4.4 > Republicans 1st half 1.4• Democrats 2nd half 3.9 ≈ Republicans 2nd half 3.4
– But annual record does not fit
• Partisan Unemployment Cycles– Democrats 5.2 < Republicans 6.1
• Democrats 1st half 5.6 ≈ Republicans 1st half 5.8• Democrats 2nd half 4.7 < Republicans 2nd half 6.5
Growth by term year
-1.00.01.02.03.04.05.06.0
0 1 2 3 4 5
Republican Democrat
Unemployment by term year
4.04.55.05.56.06.57.0
0 1 2 3 4 5
Republican Democrat
Political Monetary Cycle, 1875-1934
00.20.40.60.8
11.21.41.6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarters since last election
Independent Treasury Federal Reserve
e ee
A Political Business Cycle?Y
T
Strategic Election Timing
• PBC tests valid for US• PPC tests valid for fiscal---money ?• RPT valid for US• RPT varies for others (VRPT)
– Uncertainty over election timing• Greater divergence in output, unemployment over
course of administration• Election effects depend on when election called
