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Partisan bias in inflation expectations

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Abstract

We examine partisan bias in inflation expectations. Our dataset includes inflation expectations of the New York Fed’s Survey of Consumer Expectations over the period June 2013 to June 2018. The results show that inflation expectations were 0.46% points higher in Republican-dominated than in Democratic-dominated US states when Barack Obama was US president. Compared to inflation expectations in Democratic-dominated states, inflation expectations in Republican-dominated states declined by 0.73% points when Donald Trump became president. We employ the Blinder–Oaxaca decomposition method to disentangle the extent to which political ideology and other individual characteristics predict inflation expectations: around 25% of the total difference between inflation expectations in Democratic-dominated versus Republican-dominated states is based on how partisans respond to changes in the White House’s occupant (partisan bias). The results also corroborate the belief that voters’ misperceptions of economic conditions decline when the president belongs to the party that voters support.

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Notes

  1. In the United States, the Federal Reserve’s employees expect inflation to be higher under Democratic presidents than under Republican ones (Gandrud and Grafström 2015).

  2. In the United States, government ideology influences economic policy-making and outcomes such as economic growth (e.g., Blinder and Watson 2016; Cahan and Potrafke 2017; see Potrafke 2018 for a survey). On ideology, see also Bjørnskov (2005), Benabou (2008) Facchini and Melki (2014) and Laméris et al. (2018). On behavioral political economy, see Schnellenbach and Schubert (2015).

  3. On what determines inflation see also Lim (2019).

  4. Governments and central banks influence inflation by fiscal and monetary policies. Clearly, inflation also frequently is influenced by events that are exogenous to governments’ and central banks’ policies. Oil crises are a prime example. Bernholz (2015) summarizes the determinants of inflation.

  5. Source: Survey of Consumer Expectations, © 2013–2018 Federal Reserve Bank of New York (FRBNY). The SCE data are available without charge at http://www.newyorkfed.org/microeconomics/sce and may be used subject to license terms posted there. The FRBNY disclaims any responsibility or legal liability for the present analysis and our interpretation of Survey of Consumer Expectations data.

  6. Source: https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths.

  7. In the Distinct of Columbia, the average Democratic vote share was 89.66% over the past two elections. A vote share of 100% would be identical to employing political ideology at the individual level. Data from the District of Columbia therefore comes quite close to purely ideological voting decisions. In the District of Columbia, the average inflation expectation during the observed period is 3.26%. When Obama was president, the average inflation expectation was 2.41%, whereas it is 5.5% since Trump has been president. Thus, the change in the average inflation expectation with changes in the governing party is especially pronounced in the District of Columbia, indicating quite strongly that average inflation expectations in Democratic states are driven by Democratic voters. Other studies suggest that (aggregated) macro variables tend to predict individual voting behavior quite well (e.g., Alabrese et al. 2019; Potrafke and Roesel 2019).

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Acknowledgements

We thank Francois Facchini, Arye Hillman, Pierre-Guillaume Méon, William F. Shughart II, two anonymous referees and the participants of the Silvaplana Workshop on Political Economy 2019 for useful comments.

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Authors and Affiliations

  1. ZHAW School of Management and Law, St.-Georgen-Platz 2, 8401, Winterthur, Switzerland

    Oliver Bachmann & Ruben Seiberlich

  2. ifo Center for Public Finance and Political Economy, University of Munich, Poschingerstr. 5, 81679, Munich, Germany

    Klaus Gründler & Niklas Potrafke

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  1. Oliver Bachmann
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Correspondence to Niklas Potrafke.

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Bachmann, O., Gründler, K., Potrafke, N. et al. Partisan bias in inflation expectations. Public Choice 186, 513–536 (2021). https://doi.org/10.1007/s11127-019-00741-0

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