Is There a Political Monetary Business Cycle?

Abstract

This paper provides a political case study explanation to the otherwise pessimistic accounts of the invariance (neutrality) proposition in the rational expectations (ratex) money-output literature. With the assistance of a partisan administration computational “rule”, the anticipated and unanticipated money components are partially separated to allow for consistent partisan anticipated and unanticipated multipliers to exist.

Under republican administrations, with a lesser degree of perceived intervention in the economy, money supply is given a more unanticipated interpretation and thus incorporated to a larger degree in the calculations for determining output variance. When Democrats are in control, the larger degree of perceived intervention in the economy is given a more anticipated interpretation, and thus money supply is discounted to a larger degree, when compared with Republican administrations, from the calculations for determining output variance.