The Partisan Model Of Macroeconomic Cycles: More Theory And Evidence For The United States

The “Partisan Theory” of macroeconomic policy is based on the idea that political parties typically weight nominal and real economic performance differently, with left‐party governments being more inclined than right‐party ones to pursue expansive policies designed to yield lower unemployment and higher growth, but running the risk of extra inflation. Given suitable assumptions about the structure of the macroeconomy, partisan models imply a political signal in demand management, output and inflation movements originating with shifts in party control of the government. In this paper I develop and test with postwar US data a revised Partisan model that allows for (i) uncertainty among policy authorities about the sustainable output growth rate and therefore about how aggregate demand expansions will be partitioned between extra output and extra inflation, and (ii) ex‐post and projective learning and preference adjustment under such uncertainty. Dynamic numerical analysis of a small, stylized political‐economic model based on these extensions of Partisan Theory generates within‐sample forecasts that correspond remarkably well to the observed pattern of price, output and nominal spending fluctuations under the parties.