Presidential politics, budget deficits, and monetary policy in the United States; 1960–1976

Conclusion

This paper has focused on the extent to which the traditional tools of macroeconomic management in the United States, monetary and fiscal policy, have contributed to a political business cycle. Regardless of whether politicians can successfully influence real economic variables to their own ends, the evidence presented here suggests that they tried, and that they enjoyed some at least indirect aid from their ‘independent’ monetary authorities in doing so. Several major conclusions emerge.

• (1) Over the years 1960 to 1976 in the United States a cyclically adjusted Federal deficit was related to the Presidential electoral cycle. We find that roughly half of the high employment deficit was ultimately monetized, in the sense that an addition of one dollar to the deficit was associated with an increase in M1 of almost .50 cents.

• (2) Monetary policy responded systematically to this deficit in addition to other basic factors in the management of the money supply. The high employment deficit is in fact more important than any of the other variables included in the monetary reaction function estimated here.

• (3) When a political component of the high-employment deficit is isolated by observing the relationship of the electoral cycle to the deficit, the monetary authority may have responded even more to this component than to the residual deficit, although the politically induced deficit component as measured here is small relative to the total deficit.