Money, politics and the post-war business cycle

The political economy literature has enshrined as stylized fact the view that lower inflation and temporarily lower growth follow the election of Republican presidents and has emphasized political manipulation of monetary policy as an explanation. Support for the monetary explanation comes in econometric work that largely ignores identification issues that dominate the literature on measuring the effects of monetary policy. We generalize a standard vector autoregression framework to accommodate discrete, political party variables. We find almost no support for the view that political effects on the macroeconomy operate through monetary policy and only weak evidence that political effects are significant at all. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification. E30; E52.