1. Political Theories of the Business Cycle
Jac C. Heckelman
Associate Professor of Economics
Wake Forest University

2. Macroeconomic Formulations
Lucas supply function
Y = YN + a*(Inflation – Expected Inflation), a>0
Phillips Curve representation
U = UN + b*(Inflation – Expected Inflation), b<0

3. Political Business Cycles
Inflation I2 I1
Unemployment UE UN

4. Political Business Cycles
Inflation I2 I1
Unemployment UE UN

5. Political Business Cycles
Inflation I3 I2 I1
Unemployment UE UN

6. Political Business Cycles
Inflation I3 I2 I1
Unemployment UE UN

7. Political Business Cycles
Inflation I2 I1
Unemployment UE UN US

8. Political Business Cycles
Inflation I2 I1
Unemployment UE UN US

9. Partisan Economic Performance
Democrat
Republican
D Unemployment
D Inflation
level %
60-64
-0.3
-5.5
-20.0
68-72
2.0
55.6
-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
5.6
-8.5
-68.5
92-96
-2.1
-28.0
13.8
84-88
-2.0
-26.7
0.5
12.8
96-00
-1.4
-26.4
0.1
4.1
88-92
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
1.0
24.5
-1.7
-18.1

10. Partisan Business Cycles
Inflation
Democrats ID
Republicans IR
Unemployment UD UR

11. Rational Partisan Business Cycles
Inflation ID IE IR
Unemployment UD UN UR

12. Rational Partisan Business Cycles
Inflation ID IE IR
Unemployment UD UN UR

13. RE Political Business Cycles
Inflation I2 I1
Unemployment UE UN US

14. RE Political Business Cycles
Inflation IE I1
Unemployment UN UE

15. RE Political Business Cycles
Inflation IE IX
Unemployment UN

16. Electoral Policy CyclesD D R
Infl
Defl e e e

17. Electoral Policy CyclesD D R
Infl
Defl

18. Electoral Business CyclesD D R
Expan
Recess

19. Electoral Business CyclesD D R
Expan N*
Recess

20. Electoral Business CyclesD D R
Expan N*
Recess

21. 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

22. 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

23. Growth by term year

24. Unemployment by term year

25. Political Monetary Cycle, 1875-1934

26. A Political Business Cycle?

28. 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