ELECTORAL OUTCOMES AND FINANCIAL MARKETS
October 10, 2006
The economy has a significant impact on the outcome of elections. However, it is not fully agreed upon whether elections affect the economy. Diverging theories conclude:
- Candidates and parties tend to converge to the same economic policies -- those of the median voter -- so that who wins an election is inconsequential to the economy.
- Others believe that political parties promote discrete economic expectations and that the election of a Democrat or a Republican candidate for president will have substantially different -- and predictable -- influences on markets.
But the authors of a National Bureau of Economic Research (NBER) working paper find that over the entire 1880-2004 period, a Republican victory raised equity returns, and since the Reagan Administration, Republican victories also have raised interest rates on government bonds.
Overall, the authors find that changes in the perceived probability of electing a Republican president caused changes in expected bond yields and equity returns:
- Results showed a 2-3 percent jump in equity prices accompanying a Republican victory.
- Higher long term bond yields -- up about 0.12 percent since the Reagan administration -- are inconsistent with the traditional perception of Republicans as fiscally conservative, but consistent with the higher deficits created under Republicans since the 1980s.
But the researchers caution that the sign of partisan effects on equity prices and economic well being need not be the same. Furthermore, their analysis captures traders' expectations of partisan effects, not the parties' actual effects on economic outcomes.
Source: Matt Nesvisky, "Electoral Outcomes and Financial Markets," NBER Digest, October 2006; based upon: Erik Snowberg, Justin Wolfers and Eric Zitzewitz, "Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections," National Bureau of Economic Research, Working Paper No. 12073, March 2006.
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