the policy preferences of the us federal reserve in this paper we model and explain us macroeconomic outcomes subject to the discipline that monetary policy is set optimally exploiting the restrictions that come from optimal policymaking we estimate the parameters in the federal reserve s policy objective function together with the parameters in its optimization constraints for the period following volcker s appointment as chairman we estimate the implicit inflation target to be around 1 4 and show that policymakers assigned a significant weight to interest rate smoothing we show that the estimated optimal policy provides a good description of us data for the 1980s and 1990s

unemployment rates and political outcomes an incentive for manufacturing a political business cycle in recent years the interdependence of politics and economics has received an increasing amount of attention by both economists and political scientists the explanation for this interest lies in the rediscovery of political economy and may be at least partly due to the recent experiences that governmental advisors have had with simultaneously increasing inflation and unemployment conventional macroeconomic approaches have failed to pin point causes for the stagflation and to provide methods for solving the problem the traditional economic policies may have failed in part because these traditional solutions were simply not plausible in the political environments in which they were proposed it is the intent of a growing body of work to develop macromodels with endogenous political sectors the inference made in this literature is that 1 the economy can be manipulated or affected by a political sector and that 2 there is an incentive for the political sector to manipulate the economy this literature has however just begun to formalize the interaction of the political and economic sectors and empirical work is virtually nonexistent the purpose of this paper is to present some evidence on these two inferences in section 1 the first inference is examined in section ii literature on which the first inference is based is reviewed and evidence on the possible incentive to create such a cycle is presented in section iii concluding remarks are offered

intervention analysis of electoral tax cycle the case of japan this paper analyzed the impact of elections on tax policy in japan using an arima autoregressive integrated moving average intervention analysis from 1953 through 1992 we used discretionary tax revenues which means the changes in tax receipts attributable to changes in the tax code rather than automatic tax revenues due to business cycles in the economy

welfare consequences of the six year presidential term evaluated in the context of a model of the u s economy we evaluate the six year presidential term proposal in the context of a model of the u s economy characterized by a short run but not a long run trade off between inflation and unemployment votes and public welfare are separately conceptualized as functions of inflation and unemployment which are indirectly controlled by the president through manipulation of government spending in a series of simulation experiments the vote maximizing choice of policy instruments led to less we fare loss with six than with four year terms under most conditions ironically vote maximizing was shown to lead not only to short and long term welfare loss but also to long run political disadvantage

oil prices and inflation dynamics evidence from advanced and developing economies abstract we study the impact of fluctuations in global oil prices on domestic inflation using an unbalanced panel of 72 advanced and developing economies over the period from 1970 to 2015 we find that a 10 increase in global oil inflation increases on average domestic inflation by about 0 4 percentage points on impact with the effect vanishing after two years and being similar between advanced and developing economies we also find that the effect is asymmetric with positive oil price shocks having a larger effect than negative ones the impact of oil price shocks however has declined over time due in large part to a more credible monetary policy and less reliance on energy imports we further examine the transmission channels of oil price shocks on domestic inflation during the recent decades by making use of a monthly dataset from 2000 to 2015 the results suggest that the share of transport in the cpi basket and energy subsidies are the most robust factors in explaining cross country variations in the effects of oil price shocks during the period

international bank lending channel of monetary policy abstract how does domestic monetary policy in systemic countries spillover to the rest of the world this paper examines the transmission channel of domestic monetary policy in the cross border context we use exogenous shocks to monetary policy in systemically important economies including the u s and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross border bank lending we find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross border bank lending the effect is weakened during periods of high uncertainty in contrast the effect is found to not vary according to the degree of borrower country riskiness further weakening support for the international portfolio rebalancing channel

does the monetary policy committee still care about inflation some evidence from a small macroeconomic model this article derives an optimal taylor rule for the uk economy using a simple estimated model based on data prior to the financial crisis of 2008 optimal policy rules are calculated using simulation of the model over a long time period coupled with a search for optimal taylor rule parameters using the newton raphson loss minimization algorithm the weights in the pre crisis loss function are then inferred from the taylor rule parameters estimated from the period corresponding to bank of england independence i e 1997 2008 these estimates are consistent with a low weight on inflation relative to output stabilization even before the crisis the model is therefore consistent with the hypothesis that there has been no change in bank of england preferences and that the bank has responded to the crisis in a way which would have been predicted on the basis of its pre crisis behaviour

dynamic optimization of political popularity in an empirical macroeconomic model we estimate a political popularity function for israel taking account of the effects of institutional and political changes on the structure of the function and then use this function in conjunction with a simple macroeconomic model of the israeli economy to calculate dynamic macroeconomic strategies which would have maximized the political popularity of three previous israeli governments we conclude that the dominant strategy was always to keep unemployment at the natural rate but that this strategy was optimally combined with either rising inflation close to elections for the earlier governments or with near zero inflation throughout the term for later governments

federal reserve independence abstract the federal reserve is always called an independent agency the term independent is rarely defined the only attempt in the literature and internal records is based on chairman martin s statement that the federal reserve is independent with the government not independent of the government martin explained several times that independence within government meant that the federal reserve helped to finance government budget because they were approved by congress and signed by the president financing budget deficits is the very opposite of the principle adopted when congress approved the federal reserve act in 1913 in fact the federal reserve has supported treasury operations many times i conclude that it is far more important to have an enforceable policy rule such as the taylor rule but any rule must have a provision that permits the rule to be set aside

political business cycles 40 years after nordhaus the aim of this article is to survey the huge literature that has emerged in the last four decades following nordhaus s rev econ stud 42 2 169 190 1975 publication on political business cycles pbcs i first propose some developments in history of thought to examine the context in which this ground breaking contribution saw the light of the day i also present a simplified version of nordhaus s model to highlight his key results i detail some early critiques of this model and the fields of investigations to which they gave birth i then focus on the institutional context and examine its influence on pbcs the actual research agenda finally i derive some paths for future research

an essay on the rationality of economic policy the test case of the electional cycle the literature on electional cycles is discussed in the light of the empirical findings by in particular the author two basically different types of explanations of such cycles are compared explanations based on the maximizing behavior of governments aiming at re election explanations building on the insufficiently controlled pressures of events in a democracy it is demonstrated that even when the most well known theory under the nordhaus macraemodel is a rather fragile construction a more robust argument termed the popularity investment argument can be constructed yielding the same basic result from the empirical literature it is concluded that almost the opposite pattern actually occurs in the data it is finally demonstrated that the weak but significant empirical pattern is easy to explain by the elections generate promises which give most real expansion in the second governmental year and most inflation in the third year an average behavior which hardly implies even medium term maximization by governments as assumed under

what moves policy sentiment in spite of the fact that political eras in the united states are widely and often ambiguously defined in terms of a general policy sentiment or mood political scientists have done little in the way of rigorous analysis regarding this subject i argue that shifts in domestic policy sentiment along a liberal conservative continuum may be understood in part as responses to changing economic expectations specifically expectations of a strong economy result in greater support for liberal domestic policies whereas anticipation of declining economic conditions pushes the national policy mood to the right using quarterly data for the period 1968 88 i present a multiple time series error correction model that lends considerable support to the hypothesis

general economic conditions and national elections the fact that economic conditions influence voters is a leading commonplace of conversation in election years the question is is this fact in fact a fact despite the overwhelming popularity of the fact it has received neither an explicit theoretical analysis presumably because it is so obvious that economic adversity should create political adversaries nor until recently a satisfactory statistical analysis gerald h kramer has presented a multivariate analysis of congressional elections which would strongly suggest that fluctuations in the rate of unemployment have no appreciable effect upon elections but that fluctuations in per capita real income are influential in the following pages i propose to 1 reaffirm his finding on the electoral unimportance of ordinary fluctuations in unemployment 2 argue that contrary to kramer fluctuations in real income also do not have important electoral effects and 3 present an argument based upon rational voter behavior for the unimportance of general economic conditions in national elections

the political viability of rule based monetary policy we have estimated two models explaining political support for the president as a function of economic performance one model reflects the assumption characterizing most of the literature that voters indiscriminately punish inflation and unemployment without regard to the tradeoffs between them the other represents a more demanding conception of voter sophistication about macroeconomic possibilities and about control of the money supply while the data do not unambiguously designate a best model of behavior the sophisticated voter hypothesis performs as well as the naive voter hypothesis in the context of our study clearly this result is subject to the usual econometric caveats including possible misspecification of the model multicollinearity among independent variables etc however there is no particular reason to believe that these problems should favor one model as opposed to the other thus while we cannot conclude that voters really think in terms of rates of growth of velocity and natural output we can question the conventional wisdom that consistent rule based monetary policies may not be politically viable

electoral cycles and budgetary growth in veterans benefit programs while many studies have generated negative findings regarding the general existence of electoral cycles in economic phenomena we have found an apparently robust electoral cycle in veterans benefits this pattern was found between 1961 and 1978 but has disappeared since then we use this case to investigate the possibility that electoral cycles might contribute to the growth of government spending using two different methods of inference we find no strong basis to conclude that such cycles cause increasing public sector growth

does there exist a political business cycle a box tiao analysis theories of the political business cycle are by now common they range from the elegant theoretical work of nordhaus 1975 to the essentially empirical work of tufte 1978 they all assume that politicians manipulate the economy to aid their reelection efforts in particular politicians manipulate macroeconomic policy to create a boom just before election day golden and poterba 1980 provide an excellent review of this literature both tufte and nordhaus provide casual evidence for the existence of a political business cycle using inflation and unemployment rates as indicators of macroeconomic outcomes tufte and nordhaus predict at a minimum that unemployment should be decreasing before election day if presidents are really manipulating the economy very well then unemployment should be at a minimum in the october before the election and hence should be rising after the election in the nordhaus version the economy pays for the pre election boom with a post election surge in the inflation rate nordhaus also suggests that the president should engineer a recession early in his term to reduce inflationary expectations tufte 1978 20 presents graphs of the unemployment series and claims that visual examination shows them to be generally consistent with the hypothesis however he provides no statistical tests of the hypothesis nor does he estimate the quantitative impact of elections on unemployment tufte does not examine the inflation series nordhaus restricts himself to comparing unemployment rates in the two years preceeding and following an election with a simple nonparametric test supporting the hypothesis the literature provides several good empirical tests of the political business cycle hypothesis both paldam 1979 and mccallum 1978 test for the existence of four year cycles and find none however they do not test for discontinuous changes in the series around election day golden and poterba examine whether the use of policy instruments changes near election day and

changes in monetary regimes and the identification of monetary policy shocks narrative evidence from canada abstract using narrative evidence with a novel database of real time data and forecasts from the bank of canada s staff projections 1974 2015 we construct a new measure of monetary policy shocks and estimate the effects of monetary policy in canada we show it is crucial to account for the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991 a 100 basis point increase in our new shock series leads to a 1 0 percent peak decrease in real gdp and a 0 5 percent fall in the price level while not accounting for the break leads to a persistent decrease in gdp and a price puzzle albeit the change in monetary regime the effects of monetary policy have not changed much before and after it

private debt overhang and the government spending multiplier evidence for the united states using state dependent local projections and historical us data we find that government spending multipliers are considerably larger in periods of private debt overhang in particular while multipliers are below or close to one in low private debt states we find significant crowding in of private spending in periods of debt overhang resulting in multipliers that are much larger than one in high private debt episodes more government purchases even reduce the ratio of government debt to gross domestic product these results are robust for the type of shocks and when we control for the business cycle financial crises deleveraging episodes government debt overhang and the zero lower bound

the keynesian and political determinants of unbalanced budgets u s fiscal policy from eisenhower to reagan the political business cycle proposition that politicians manipulate fiscal policy for political advantage is largely untested more often than not such manipulation is only assumed to occur on the basis of observed movements in inflation and unemployment and the few direct tests of the manipulation hypothesis are characterized by limited consideration of the full possibilities for political influence inadequate control for nonpolitical stabilization policy and inconsistent results this paper constructs several models of political fiscal policy incorporates them into a simple model of keynesian stabilization policy and tests the combined models using u s budget surplus deficit data from fy54 to fy83 the results provide little support for either the electoral motivation or partisan differences interpretations of the political business cycle the implications of these findings for the political business cycle literature long term economic management and deficit directed proposals for institutional reform are discussed

the political process and the use of debt financing by state governments empirical evidence offered in this study suggests that decisions by state government officials to effect debt financed spending depend in part on the state s gubernatorial election cycle more specifically the results reveal relative increases in state debt issues in anticipation of elections and furthermore they reveal that such increases are more significant for states characterized by high interparty political competition while theoretical limitations preclude a definitive explanation for these results the evidence is consistent with a view of state political markets where incumbent parties manipulate public policy so as to enhance the probability of success in pending elections this insight is significant in that it suggests a relationship between public policy decisions and election cycles in a context heretofore unexplored

a new view of political accountability for economic performance most political support models imply that in evaluating economic performance voters use a standard that would provide poor predictions of the future and leave the economy vulnerable to manipulation by vote hungry politicians drawing on macroeconomic theory we develop a simple standard of evaluation which encompasses a concern not only for current economic outcomes but also for accurately assessed future consequences of current policies we find that political support for the president can be explained as well by models that assume that voters use this sophisticated standard as by models that assume voter naivete our analysis questions the wisdom of measures typically used to assess voter evaluation of economic performance in a variety of theoretical contexts the results also help to explain the absence of convincing evidence that governments exploit voter ignorance in manipulating the economy

the permanent effects of fiscal consolidations abstract the global financial crisis has permanently lowered the path of gdp in all advanced economies at the same time and in response to rising government debt levels many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates we empirically explore the connections between these two facts by extending to longer horizons the methodology of blanchard and leigh 2013 regarding fiscal policy multipliers our results provide support for the presence of strong hysteresis effects of fiscal policy the large size of the effects points in the direction of self defeating fiscal consolidations as suggested by delong and summers 2012 attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to gdp ratio through their long term negative impact on output

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

should monetary policy respond strongly to output gaps much recent monetary policy analysis has featured stochastic simulations with small structural macroeconomic models that include a spending vs saving is sector a price adjustment sector and an interest rate policy rule the first two are frequently specified so as to reflect optimizing behavior policy may or may not be specified as optimizing depending on the study s objectives some leading issues concern modifications to simple quantitative optimizing models that are needed to generate realistic degrees of persistence in inflation and output gap variables a major policy issue is whether it is desirable for monetary policy to respond strongly to the output gap the paper argues that the latter is unobservable and considers the implications of using a trend type measure while the true concept is of a type more in keeping with basic theory in such circumstances highly undesirable consequences are likely to ensue if policy responds strongly to the measured gap this abstract was borrowed from another version of this item

presidential popularity and macroeconomic performance are voters really so naive f ollowing the pioneering work of kramer 1971 numerous studies have analyzed the relationships between the macroeconomic performance of political administrations and their popularity or vote getting ability kramer s work showed that the aggregate congressional vote for an incumbent party can be explained rather well by variables indicating recent economic performance subsequent works have extended kramer s research by explaining presidential vote or gallup poll popularity data with similar models on one point almost all of these studies agree 2 votes and popularity can be explained well by models which suppose that voters judge policymakers on the basis of retrospective evaluation of past macroeconomic outcomes most authors interpret their results as being supportive of the hypothesis of rational voters since the evidence indicates that voting decisions are not based purely upon personalities party affiliation or chance kramer argued that if voters regard past macroeconomic performance of an administration to be indicative of future performance then a concern with past performance indicates a concern for future performance voters who simply extrapolate from the past to predict the future are rather naive however a sophisticated voter who has an understanding of the important intertemporal constraints embodied in the structure of the economy would be able to forecast future consequences of current policy choices more accurately than one who simply extrapolates if votes and popularity are simply functions of past outcomes then voters must either be ignorant of the basic structure of the economy or unconcerned with the future the supposition that voters are so naive might run counter to the intuition of most economists who generally assume individual rationality as a central behavioral postulate nevertheless the empirical results noted above have been accepted by many as evidence that voters do misperceive their own long run interest the implications of the naive voter hypothesis for macroeconomic policymaking are disturbing nordhaus 1975 has developed a model which shows that voter naivete can encourage vote maximizing politicians to induce political business cycles and an inflationary bias there is some but not unanimous empirical support for the existence of politically motivated business cycles and casual empiricism also suggests that politicians themselves believe in the naive voter 3 while studies show that empirical evidence is consistent with the notion that voters are concerned with the recent past the results do not reject a sophisticated voter hypothesis none of the aforementioned studies has tested a model consistent with a sophisticated voter hypothesis i e a model in which voters understand what outcomes are feasible in the long and short runs and are concerned with future as well as current and past economic performance in this paper we develop such a model and estimate it using gallup poll data on presidential popularity results of this model are compared to results from a naive voter model similar to those employed in previous research received for publication february 4 1982 revision accepted for publication july 30 1982 university of south carolina i am grateful for helpful comments provided by ray fair douglas hibbs william keech daniel richards abel l da costa fernandes and an anonymous referee i also wish to thank william keech for providing me with the gallup poll data on presidential approval rates aurel schubert provided excellent research assistance fair 1978a bloom and price 1975 arcelus and meltzer 1975 and pollard 1981 a 1981 b have all estimated models to explain voting while frey and schneider 1978 and hibbs i 982a 1982b have developed models to explain presidential popularity 2 an exception is provided by arcelus and meltzer 1975 3nordhaus 1975 and tufte 1978 have provided evidence of political business cycles for a number of western democracies and frey and schneider 1978 and maloney and smirlock 1981 have estimated policy reaction functions suggesting that the timing of elections affects policymaking see tufte for a discussion of casual empirical evidence indicating that politicians believe that current economic conditions affect electoral outcomes

macroeconomic effects from government purchases and taxes for u s annual data that include world war ii the estimated multiplier for temporary defense spending is 0 4 0 5 contemporaneously and 0 6 0 7 over 2 years if the change in defense spending is permanent gauged by ramey s defense news variable the multipliers are higher by 0 1 0 2 since all estimated multipliers are significantly less than 1 greater spending crowds out other components of gdp particularly investment the lack of good instruments prevents estimation of reliable multipliers for nondefense purchases multipliers in the literature of two or more likely reflect reverse causation from gdp to nondefense purchases increases in average marginal income tax rates measured by a newly constructed time series have significantly negative effects on gdp when interpreted as a tax multiplier the magnitude is around 1 1 the combination of the estimated spending and tax multipliers implies that the balanced budget multiplier for defense spending is negative we have some evidence that tax changes affect gdp mainly through substitution effects rather than wealth effects

austerity in the aftermath of the great recession abstract cross country differences in austerity defined as government purchases below forecast account for 75 of the observed cross sectional variation in gdp in advanced economies during 2010 2014 statistically austerity is associated with lower gdp lower inflation and higher net exports a multi country dsge model calibrated to 29 advanced economies generates effects of austerity consistent with the data counterfactuals suggest that eliminating austerity would have substantially reduced output losses in europe austerity was so contractionary that debt to gdp ratios in some countries increased as a result of endogenous reductions in gdp and tax revenue

social preferences inflation unemployment and political business cycles econometric evidence for the reagan presidency it is now common for theoretical analyses of macroeconomic policy to assume that the public s social preferences between inflation and unemployment may be represented by an indifference map that is concave to the origin and most assume that the functional form is quadratic we estimate such a quadratic social preference function we proxy public satisfaction by the public s rating of presidential performance using gallup poll data 2 such data have been widely used by both economists and political scientists in analyses of the economic and non economic determinants of presidential popularity 3 as we have found 33 that over the period 1953 to 1988 there have been structural shifts in the relationship between presidential popularity and inflation and unemployment we limit our analysis to only one presidency the reagan administration

business cycles and the political process the interrelationship between the political sector and the macroeconomy in democratic societies has been examined extensively in recent years research in this area has generally been concerned with two issues first following the lead of kramer 16 various authors have examined the impact of economic conditions on congressional 1 13 21 24 and presidential elections 4 5 the results at the congressional level have been mixed but it is reasonably safe to conclude that economic conditions do affect presidential elections the second issue and the one of primary concern in this study has dealt with the development of models of politico economic interaction the basic concept in these models is that an administration s popularity and therefore the probability of staying in power depends critically on economic conditions knowing this the administration seeks to manipulate the economy in order to maintain power the use of economic tools for political goals by governments is well established in the literature theoretical contributions by nordhaus 20 and macrae 18 have demonstrated the potential for a politically motivated business cycle in a world of politico economic interaction empirical support for the existence of such a cycle is provided by the work of frey and schneider 7 8 9 the main purpose of this paper is to develop a theoretical model of the political business cycle that generates empirically testable proposition the goal is to integrate the theoretical conclusions of a formal model similar to the nordhaus 20 and macrae 18 framework with the empirical support provided by frey and schneider 7 8 9 the possibility of a political business cycle is important for several reasons in macroeconometric models government policy that is endogenous to the system is usually treated as if it were exogenous this may cause serious misspecification errors further forecasts of the future course of economic events which depend heavily on government action will be inaccurate unless the political motivations of governments are considered

presidential popularity and the economy abstract this study tests the hypothesis that the sensitivity of the president s popularity to economic events differs across distinct demographic groups assuming that presidental popularity is negatively related to both the unemployment rate and the inflation rate the electorate is disaggregated according to sex age race education income and political affiliation and separate regressions are estimated for the individual subgroups using quarterly data covering 1976 through 1988 statistically significant differences in the marginal effects of unemployment and inflation on presidential approval are discovered for the various subgroupings

the political timing of errors in inflation forecasts errors in inflation forecasts do not display a regular electoral rhythm over the entire post war period these results are consistent with the work of mccallum 1978 who explored a sample of similar length and failed to find an electoral pattern in unemployment rates however if unanticipated inflation is regarded as a lagging indicator of policy effectiveness then the data do suggest that three of the four most recent administrations have enjoyed a certain success in manufacturing a pre election upturn

rationality and the political business cycle the case of local government the empirical results which have been reported support the hypotheses implied by the model of rational political behavior set out in section 2 in pre election periods local government development expenditures deviate significantly from their normal levels the extent of deviation is approximately 20

electoral and welfare consequences of political manipulation of the economy abstract this paper examines the long term electoral and welfare consequences of repeated strategies whereby a political office holder induces cycles in economic variables to maximize his chances of re election unlike other studies of political business cycles we focus on questions of the desirability of these cyclical patterns and on the long run properties of these political economic models noting that the welfare costs of vote maximizing in a single term extend beyond that term we examine in detail the properties of the long run equilibrium path to which such cycles converge if the economy starts above this path vote maximizing can lead to increased social welfare and vote margins however if the economy starts below this path vote maximizing in the present can cause reduced votes and electocal defeat in subsequent terms this possibility should lead a far sighted enlightened politician or political party to eschew vote maximizing tactics and the political business cycles which accompany them and thus canhelp explain why empirical studies have not found convincing evidence of the existence of such cycles this paper also quantifies the dependence of this long run equilibrium path on the important political and economic parameters of the model

fiscal multipliers and the level of economic activity a structural threshold var model for the uk this article examines the impact of fiscal policy shocks in the uk economy using a nonlinear structural threshold vector autoregression tvar model which links gross domestic product gdp govern

unanticipated money and the political business cycle six different series of one period forecasts for money growth are generated for each year 1960 through 1984 the prediction errors are analyzed to see whet herthe authorities attempted to expand the economy in election years by unexpectedly raising money growth while there is no evidence of attempts to fool the public throughout the entire 1960 84 period such fooling may have been tried through 1974 it is speculated that the public discussion of expectations formation and of politicians motivations since then may have signaled officials that further attempts to mislead the public would be prohibitively costly copyright 1986 by ohio state university press

the political manipulation of macroeconomic policy conventional wisdom and some research indicate that macroeconomic policies follow cycles corresponding to political as well as economic forces using vector autoregression analysis i test three models of monetary policy determination for the united states 1953 1984 the electoral cycle model that reelection motivations on the part of presidents create a policy cycle the party differences model that policy changes reflect revolving presidential party administrations and the referendum model that changes in presidential approval create in effect a continuing referendum allowing presidents to monitor their success and change macroeconomic policies when necessary analysis shows that monetary policies as measured by the monetary base and short term interest rates respond to the election cycle and presidential approval although the effect on macroeconomic outcomes is ambiguous party differences are found in real income but are not very significant in other variables

the electoral budget cycle this article begins with a review of the now substantial literature on the thesis that polticians manipulate governmental outputs so as to favor their chances of reelection it concludes that while this electoral cycle thesis was initially overstated by its proponents it retains more plausibility than recent critics have allowed this conclusion is then demonstrated through an analysis of expenditures by the ten provincial governments in canada between 1951 and 1984

labor market reforms and the monetary policy environment abstract do labor market reforms initiated in periods of loose monetary policy yield different outcomes from those that were introduced in periods when monetary tightening prevailed the answer to this question is a firm yes we document the vital role of accommodative monetary policy for an increase in unemployment benefits spending on active labor market policies and labor market deregulation to boost growth and reduce unemployment it was found that if interest rates cannot be reduced then unemployment benefits should be lowered a more rigid labor market it was further found can deliver expansionary effects especially during the crisis period

uncovering the hit list for small inflation targeters a bayesian structural analysis we estimate underlying structural macroeconomic policy objectives of three of the earliest explicit inflation targeters within the context of a small open economy dynamic stochastic general equilibrium model we assume central banks set policy optimally such that we can reverse engineer policy objectives from observed time series data joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective none of the central banks show a concern for stabilizing the real exchange rate all three central banks share a concern for minimizing the volatility in the change in the nominal interest rate we also show that the resulting optimal policy rule responds to exchange rate movements even in the case where the central banks do not explicitly care about exchange rate stabilization this result is also corroborated by results from an alternative simple rule characterization and estimation of central bank behavior these last two findings point to the pitfalls of making inferences from the level of ad hoc simple rules about what central banks may care about

an integrated test for electoral cycles in the u s economy this paper offers the first integrated test of the electoral model of business cycles the test begins with unrestricted estimates of presidential electoral patterns in u s economic outcomes real gnp unemployment and inflation and policies money growth and the adjusted budget surplus these estimates are then used to determine whether the estimated electoral patterns in macropolicy yield predicted electoral patterns for macro outcomes that are consistent with estimates of both actual electoral patterns in outcomes and voting behavior the results indicate that four year electoral cycles in macroeconomic outcomes and policies are strongly significant for the united states for the period 1951i to 1986ii copyright 1989 by mit press

austerity and private debt this study provides empirical evidence that the costs of austerity crucially depend on the level of private indebtedness in particular fiscal consolidations lead to severe contractions when implemented in high private debt states contrary fiscal consolidations have no significant effect on economic activity when private debt is low these results are robust to alternative definitions of private debt overhang the composition of fiscal consolidations and controlling for the state of the business cycle and government debt overhang i show that deterioration in household balance sheets is important to understand private debt dependent effects of austerity

the effects of income distribution and fiscal policy on aggregate demand investment and the budget balance the case of europe this paper develops a multi country post kaleckian model that incorporates the role of the government one key novelty of the model is that it integrates cross country effects of both changes in income distribution and fiscal policy the model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand and the budget balance in eu15 countries the results show that a simultaneous increase in the wage share in all eu15 countries would increase demand and the primary budget balance in all countries a simultaneous increase in government spending turns out to boost economic activity in all the eu15 countries indicating the positive economic effects of expansionary fiscal policy moreover a progressive tax policy that would be implemented simultaneously at the eu level would lead to an increase in output in all countries

local deficits and local jobs can u s states stabilize their own economies abstract using a sample of the 48 mainland us states for the period 1973 2009 we study the ability of us states to expand their own state employment through the use of state deficit policies the analysis allows for the facts that us states are part of a wider monetary and economic union with free factor mobility across all states and that state residents and firms may purchase goods from neighboring states those purchases may generate economic spillovers across neighbors estimates suggest that states can increase their own state employment by increasing their own deficits there is evidence of spillovers to employment in neighboring states defined by common cyclical patterns among state economies for large states aggregate spillovers to its economic neighbors are approximately two thirds of the large state s job growth because of significant spillovers and possible incentives to free ride there is a potential case to actively coordinate i e centralize the management of stabilization policies finally the job effects of a temporary increase in state own deficits persist for at most one to two years and there is evidence of a negative impact on state jobs when these deficits are scheduled for repayment

political models of the business cycle should be revived political models of the business cycle have typically been ignored because they appear inconsistent with rational behavior and because empirical evidence is inconclusive this paper addresses the second issue demonstrating for u s real gnp unemployment and inflation that electoral cycles persistent patterns across electoral terms are significant but apparently only for republican incumbents and that partisan cycles persistent differences between parties are also significant these findings are consistent with the conjecture that a minority party is more constrained by electoral concerns whereas a majority party is freer to pursue partisan objectives

nonlinear effects of fiscal policy over the business cycle abstract is fiscal policy more effective measured by the government spending multiplier or the tax multiplier when the economy is weak than when it is strong results in the empirical literature have been mixed using local projection techniques i estimate the impulse responses of real output and real government spending to a shock to military spending i also estimate the responses of real output and real tax revenues to a shock in taxes in both cases i allow for nonlinearity in the effects according to whether the unemployment rate is above or below a given threshold value i find that raising the threshold unemployment rate incrementally leads to a higher multiplier on government purchases in the bad state of the world though it is not significantly greater than 1 the results for tax changes are even less precisely estimated due to lower instrument relevance of the exogenous tax shocks

output spillovers from changes in sovereign credit ratings this research examines how a sovereign rating revision of one country influences the economic growth rates of other countries rating revisions have significant output spillover effects a one notch upgrade downgrade prompts on average a significant downward revision of about 0 03 0 07 in the consensus forecast of annual economic growth rates of other countries in the two month period after the event the spillovers are transmitted through direct and indirect trade and financial linkages between event and non event countries the evidence indicates that a predominance of differential common spillovers leads upgrades downgrades to produce adverse output effects for other countries

is the fed too timid monetary policy in an uncertain world estimates of the taylor rule using historical data from the past decade or two suggest that monetary policy in the u s can be characterized as having reacted in a moderate fashion to output and in

the congress and fiscal policy although the common belief is that the congress has paid little attention to fiscal policy the same kinds of political economic models which have been used to explain presidential budgetary policy may be used equally well to explain congressional budgetary behavior the congress fiscal policy appears to be systematically sensitive to both economic and political factors changes in the unemployment rate have a major impact on congressional budgetary policy as for political factors the president s lead is followed most closely on revenue proposals and not at all on the expenditure side the electoral cycle in particular the off year congressional election year is also important inducing larger deficits and smaller increases in revenues

heterogeneous government spending multipliers in the era surrounding the great recession abstract we use novel quarterly data of u s states to examine the dynamics of relative spending multipliers in the decade surrounding the great recession while multipliers were around 1 in expans

output spillovers from fiscal policy in this paper we estimate the cross country spillover effects of government purchases on output for a large number of oecd countries following the methodology in auerbach and gorodnichenko 2012a b we allow these multipliers to vary smoothly according to the state of the economy and use real time forecast data to purge policy innovations of their predictable components we also consider the responses of other key macroeconomic variables our findings suggest that cross country spillovers have an important impact and also confirm those of our earlier papers that fiscal shocks have a larger impact when the affected country is in recession

estimating fiscal multipliers news from a non linear world we estimate non linear vars to assess to what extent fiscal spending multipliers are countercyclical in the us we deal with the issue of non fundamentalness due to fiscal foresight by appealing to sums of revisions of expectations of fiscal expenditures this measure of anticipated fiscal shocks is shown to carry valuable information about future dynamics of public spending results based on generalised impulse responses suggest that fiscal spending multipliers in recessions are greater than one but not statistically larger than those in expansions however non linearities arise when focusing on extreme events that is deep recessions versus strong expansionary periods

money and politics in a small open economy a time series analysis indicates monetary growth and the gallup poll in canada are systematically related at electoral cycle periodicities 5 to 20 quarters under flexible exchange rates and demonstrates the absence of an electoral component in canadian monetary growth under fixed rates these results confirm empirically a widely accepted extension of the mundell fleming argument that monetary policy is effective only under flexible rates which to my knowledge has not before been directly investigated international constraints on the small open economy under fixed rates lead to the abandonment of monetary policy as an active instrument in electoral politics

the is curve and the transmission of monetary policy is there a puzzle in this paper the performance of the new keynesian is curve for the g7 countries is assessed it is found that there is an is puzzle for both the purely backward looking as well as for the forward looking is curve the real interest rate does not have a significantly negative effect on the output gap based on an extended specification of the is curve also including asset prices and monetary aggregates a significantly negative interest rate effect on aggregate demand is found for all countries this finding suggests that a richer specification of the is curve in empirical work may be necessary in order to obtain an unbiased estimate of the effect of monetary policy on aggregate demand