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EVALUATING RATIONAL PARTISAN BUSINESS CYCLE THEORY *
Author(s) -
Sheffrin Steven M.
Publication year - 1989
Publication title -
economics and politics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.822
H-Index - 45
eISSN - 1468-0343
pISSN - 0954-1985
DOI - 10.1111/j.1468-0343.1989.tb00016.x
Subject(s) - business cycle , boom , recession , economics , stock market , rational expectations , predictive power , interpretation (philosophy) , politics , macroeconomics , positive economics , econometrics , financial economics , political science , law , paleontology , philosophy , epistemology , horse , environmental engineering , biology , computer science , engineering , programming language
This paper provides new tests of the recently developed theory of rational partisan business cycles. According to the theory, resolution of uncertainty about electoral consequences and partisan differences in economic behavior produce downturns following victories of conservative parties and booms following victories of liberal parties. The first tests utilize the behavior of financial markets to reassess the evidence for the United States. We provide evidence that the stock market does have predictive power for output and estimate an econometric relationship which is then used to gauge the extent to which the recessions are anticipated after elections. The second test uses an international sample of democracies in the postwar era to examine the theory outside the United States using time series models and political variables. The results of the tests provide little support for a strict interpretation of the theory.