The Unemployment Rate Consequences of Partisan Monetary Policies

Abstract

Economists and political scientists have identified several ways in which political motivations and institutional arrangements can affect macroeconomic policymaking. One way is described by the political business cycle model [42; 37], in which vote-seeking politicians manipulate the path of the economy to secure unsustainably favorable conditions at election times. Variants of this model have been widely tested, with limited success.' A second channel for political impacts comes through partisan policy changes brought about by electoral turnover. The pathbreaking work in this literature includes the contributions of Hibbs [30; 31; 32; 33] and Beck [11]. These works have focused on the empirical issue of how unemployment rates vary under Democratic and Republican presidents in the U.S., and have found strong support for the proposition that unemployment rates decline under Democratic administrations. A third phenomenon has been studied primarily by economists, and concerns the credibility problem faced by a central bank selecting money growth rates. Models of the credibility problem [8; 21] describe a setting in which the central bank and the public interact by respectively choosing actual and expected money growth rates. In a variant of the prisoners' dilemma, this interaction can result in excessive inflation.