POLITICAL BUSINESS CYCLES IN THE NEW KEYNESIAN MODEL |
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| Authors: | FABIO MILANI |
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| Institution: | 1. Milani: Assistant Professor, Department of Economics, University of California, 3151 Social Science Plaza, Irvine, CA 92697‐5100. Phone 949‐824‐4519, Fax 949‐824‐2182, E‐mail fmilani@uci.edu, Homepage: http://www.socsci.uci.edu/fmilani;2. I would like to thank the editor and two anonymous referees, as well as Michelle Garfinkel, Ami Glazer, Kevin Grier, and my conference discussants Fabio Mendez and Rodrigo Martins for helpful comments and suggestions. |
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| Abstract: | This paper tests various political business cycle theories in a New Keynesian model with a monetary and fiscal policy mix. All the policy coefficients, the target levels of inflation and the budget deficit, the firms' frequency of price setting, and the standard deviations of the structural shocks are allowed to depend on “political” regimes: a preelection versus postelection regime, a regime that depends on whether the president (or the Fed chairman) is a Democrat or a Republican, and a regime under which the president and the Fed chairman share party affiliation in preelection quarters or not. The results provide evidence that several coefficients are influenced by political variables. The best‐fitting specification, in fact, is one that allows coefficients to vary according to a regime that depends on whether the economy is in the few quarters before a presidential election or not. Monetary policy becomes considerably more inertial before elections and fiscal policy deviations from a simple rule are more common. There is some evidence that policies become more expansionary before elections, but this evidence disappears for monetary policy in the post‐1985 sample. (JEL C11, D72, E32, E52, E58, E63) |
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