Manfred Gärtner

Democracy, elections, and macroeconomic policy: Two decades of progress

Abstract The paper traces how macroeconomic analyses of politico-economic interaction developed since the 1970s. Progress is highlighted by discussing a digestible number of models. Rather than aiming for an exact replication of each featured model, the emphasis is on conveying the central ideas in a unifying, logically coherent and simple framework. After starting out with a brief rationalization of the Nordhaus-type political business cycle (PBC), related game-theoretic models are introduced. Topics covered are: inflationary bias, credibility and reputation, supply-side and equilibrium PBCs, rational partisan theory, PBCs in open economies, and policy coordination.

Is there an election cycle in American stock returns

Abstract This paper demonstrates that for more than three decades U.S. stock prices have followed a four-year cycle: stock prices fall during the first half of a presidency, and rise during the second. This holds for different stock indexes, nominal or real. It shows up under Democrat and under Republican rule, seems fairly robust over time, and does not disappear if the estimation equation is augmented by ARMA processes or macroeconomic variables. In hindsight, exploitation of this cycle could have resulted in a real rate of return of 57.52 percent for four years, as compared to 21.66 percent produced by a simple buy-and-hold strategy.

Who wants the euro - and why? Economic explanations of public attitudes towards a single European currency*

The paper looks at whether public attitudes towards a single European currency held in the European Union member states reflect a rational evaluation of the involved benefits and costs. It finds that they do: the looser monetary and fiscal policy was in the past, and the more time a country spent in the EMS, the more citizens welcome the euro. Attitudes towards the euro do not seem consistent with attitudes towards a European Central Bank, however. Upon closer scrutiny, opponents of a single currency appear to be less consistent and less rational in their responses than proponents.

Political Macroeconomics: A Survey of Recent Developments

The paper surveys political macroeconomics, covering its development from Rogoffs conservative central banker to the most recent discussions of monetary policy and institutional design. Topics include the inflation-stabilization trade-off, central bank independence with escape clauses and overruling with costs, inflation targets, performance contracts for monetary authorities, and the consequences of output persistence for these issues. Further topics are the political business cycle when output is persistent, the political macroeconomics of fiscal policy, the government spending bias, and the game-theoretic interaction between fiscal and monetary policy. All work is discussed within a coherent analytical framework. Copyright 2000 by Blackwell Publishers Ltd

Teaching Economics to Undergraduates in Europe: Volume, Structure, and Contents

Abstract The structure and contents of undergraduate programs in economics and management sciences differ among the major European universities. Based on analyses of curriculums, course syllabuses, and adopted textbooks, the author looks at how much time is spent in pertinent programs, how time is allocated among different courses within programs, what common thematic denominators exist, and finally and most importantly, whether and in what way content taught in micro and macro courses differs. Based on examinations of how the coverage in major textbooks has evolved through successive editions, he also looks for trends and cycles in what is taught in undergraduate micro and macroeconomics.

Historical experiences with flexible exchange rates: A simulation of common qualitative characteristics

Abstract This paper develops an analytical model of price and exchange rate determination which formalizes the evolution of the money supply expectations process. Calibration and simulation of the model demonstrates its ability to replicate certain ‘stylized facts’ that characterize 17 historical experiences with flexible currency prices under inflationary conditions. Furthermore, the model proves capable of tracing actual prices and exchange rates in a number of selected historical cases. Rather than treating each experience as a singular historical event, the paper thus constitutes a step towards a general account of the rich experience with flexible exchange rates during the last two centuries.

The quest for political cycles in OECD economies

Abstract Several authors have recently scrutinized OECD data for (rational) political business cycles and (rational) partisan effects. This paper takes issue with the conclusions forwarded in the most influential of these studies, and shows: (i) the election of a left-of-center party raises the level of real activity and inflation permanently, while a right-of-center party success accomplishes the opposite; (ii) test designs and estimation results do not warrant the judgement that rational expectations versions of pertinent models outperform pre-rational expectations counterparts; (iii) empirical findings are inconsistent with the rational political business cycle model.

Socialist Countries' Sporting Success before Perestroika - and after?

Western success at the Olympics, in soccer, and in tennis is closely correlated with aggregate income in the country under consideration. Socialist performance does not fit into this explanation because the public-good aspect of international sporting success bears more forcefully on centrally planned allocative decisions than on results produced by the market. This explains why Socialist countries overachieve at the Olympics, but perform poorly in professional sports with high marketability such as tennis. Those Socialist countries, however, which successfully support their athletes competing in Western pro sports pay the price of a rather mediocre national performance at the Olympiads.

Governments, Trade Unions and the Macroeconomy: An Expository Analysis of the Political Business Cycle

Summary and conclusionsWe have briefly reviewed the state of the art of research on the political business cycle in the context of a simple textbook model of the macroeconomy. It has been demonstrated that the government-generated political business cycle vanishes as expectations turn rational. Even then, however, non-inflationary policies apparently are time inconsistent. Hence, democracies seem to be stuck with some sort of inflationary bias.Countries with fairly centralized wage bargaining and strong labor unions have to deal with a second political source of instability in the macroeconomy: if the labor unions program contains political items such as equal educational opportunities for working class children, extended co-determination, a more equal distribution of wealth, and the like, they will prefer to see those parties in power who show the best prospects of implementing those items. So the trade unions wage bargaining strategies take into account how bargaining results influence the state of the economy and, hence, the reelection prospects of the ruling government — and they will do so in different ways, depending on whether the union prefers the government to the opposition party or vice versa.Since this trade-union-generated or supply-side political business cycle reflects movements of the natural unemployment rate (or of the natural output level) implied by union wage policies, it does not disappear under rational expectations. It also does not seem to disappear if we consider the interaction between the trade union and the government as a Stackelberg-type game, in which the union makes the first move.This result sheds some new light on todays view of the political business cycle, in that learning on the part of the economy will eliminate the ups and downs of the real variables which governments might try to generate and, in that appropriately formulated rules will eventually remove the remaining inflationary bias. These hopes and propositions are obviously doomed to the extent that the political business cycle has its roots in the supply side of the economy. If trade unions want to and possess the power to manipulate aggregate supply in order to promote their own political interests, neither an increased rationality of expectations nor rules binding the hands of utility-maximizing governments or central banks will do any good.On the empirical side, the notion of a supply-side political business cycle may help to understand why the available evidence on the political business cycle gives a rather vague picture. On the one hand, for those believing in the rationality of expectations it may help to explain why nevertheless a number of studies have come up with positive evidence for election related cycles of economic aggregates. On the other hand, for those believing that real life typically fashions more naive forms of expectation formation which would leave vote-maximizing demand management effective, the supply-side political business cycle may help to explain why there may be no stable statistical correlation between output indicators and election dates.

The election cycle in the inflation bias: evidence from the G-7 countries

Abstract This paper derives and evaluates empirical implications which separate the naive voters view [Nordhaus, W.D., 1975. The political business cycle. Review of Economic Studies 42, 169–190.] from the rational-voters view [Barro R., Gordon, D., 1983. Rules, discretion, and reputation in a model of monetary policy. Journal of Monetary Economics 12, 101–121.] under rational expectations. The observational equivalence of the two approaches obtained under a natural rate vanishes as output persistence is introduced. An analysis of inflation in the G-7 countries reveals election patterns supporting the joint hypothesis that demand shocks persist and that monetary policy courts retrospective voters. Patterns turn weaker as central banks become more independent, but do not disappear. Reducing inflationary bias not only requires more central bank independence, but as well less persistence.