Examining Tufte’s Political Business Cycle under an Adaptive Expectations Framework

Given that the executive branch’s party desires reelection and that the economy is an important variable in the eyes of the electorate, to what extent has the president and his party been able to exert influence over economic variables in the months preceding an election? Much of the existing literature suggests that there may be an important cyclical pattern between the four-year election cycle and economic variables such as real GDP growth and real disposable income. Using data from the Council of Economic Advisors and the Presidential Elections dataset, this paper finds moderate evidence for the existence of a political business cycle as it applies to GDP growth rates and real disposable income. Subsequent analysis reveals that during elections with significantly high and low GDP growth rates, election results can be perfectly predicted based on the theoretical model. This article is available in Undergraduate Economic Review: http://digitalcommons.iwu.edu/uer/vol6/iss1/1 1 Examining Tufte’s Political Business Cycle under an Adaptive Expectations Framework Anna Konradi Illinois Wesleyan University akonradi@iwu.edu Project Advisor: Dr. Michael Seeborg Abstract Given that the executive branch’s party desires reelection and that the economy is an important variable in the eyes of the electorate, to what extent has the president and his party been able to exert influence over economic variables in the months preceding an election? Much of the existing literature suggests that there may be an important cyclical pattern between the four-year election cycle and economic variables such as real GDP growth and real disposable income. Using data from the Council of Economic Advisors and the Presidential Elections dataset, this paper finds moderate evidence for the existence of a political business cycle as it applies to GDP growth rates and real disposable income. Subsequent analysis reveals that during elections with significantly high and low GDP growth rates, election results can be perfectly predicted based on the theoretical model.Given that the executive branch’s party desires reelection and that the economy is an important variable in the eyes of the electorate, to what extent has the president and his party been able to exert influence over economic variables in the months preceding an election? Much of the existing literature suggests that there may be an important cyclical pattern between the four-year election cycle and economic variables such as real GDP growth and real disposable income. Using data from the Council of Economic Advisors and the Presidential Elections dataset, this paper finds moderate evidence for the existence of a political business cycle as it applies to GDP growth rates and real disposable income. Subsequent analysis reveals that during elections with significantly high and low GDP growth rates, election results can be perfectly predicted based on the theoretical model. A Government is not supported a hundredth part so much by the constant, uniform, quiet prosperity of the country as by those damned spurts which Pitt used to have just in the nick of time. -Brougham, 1814