Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2001:22: Assigning Economic Policy and Business Cycle Shocks to Democrats and Republicans: A Common Trends Approach

Göran Hjelm ()
Additional contact information
Göran Hjelm: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: We estimate a so called common trends model of federal taxes and spending in the U.S.. Using dates on presidential terms as well as the NBER business cycle, we are able to interpret the estimated permanent shock as being of structural policy origin and the transitory shock as being of (to politicians) exogenous business cycle origin. Apart from strong partisan effects, we find that Republicans attempts to reduce the public sector during the first half of the term and that Republicans also have been unlucky to have been in office during the major part of the negative (exogenous) business cycle shocks.

Keywords: Fiscal policy; Democrats; Republicans; Partisan differences; Common Trends

JEL-codes: C32; E61; H11

24 pages, November 16, 2001

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