THE EFFECT OF CONGRESSIONAL MAJORITIES ON FINANCIAL VARIABLES
July 20, 2007
Measuring financial market responses to changes in the majority party in the U.S. Congress gives insight into how the economy reacts to changes in congressional majorities and the president, according to a National Bureau of Economic Research Working Paper.
According to the authors, after studying the 2006 midterm elections and comparing them with financial variables:
- The estimated effect of a change in the majority party in the Senate on the S&P 500 was only 0.17 percent, which while statistically significant was much smaller than the corresponding estimate of 2 percent for the presidency in 2004.
- The effect of partisan majorities in the Senate on other financial variables was essentially zero.
- The relative unimportance of Congress for the economy relative to the Executive Branch is further underscored by the fact that the largest event in their financial data was a 0.6 percent rally in the S&P 500 and other indices following the post-election announcement of Donald Rumsfeld's resignation from the cabinet.
Analysis of the 2002 election was similar, with congressional-related market outcomes significantly smaller than the effect of the party of the president. Overall, the authors conclude that the majority party in Congress has relatively little control over economic policy, at least as these economic levers affect equity, bond, oil and currency prices. This is not to deny an important role for Congress, they say, but simply to note little evidence of influence on economic aggregates.
Source: Matt Nesvisky, "The Effect of Congressional Majorities on Financial Variables," NBER Digest, July 2007; based upon: Erik Snowberg, Justin Wolfers and Eric Zitzewitz, "Party Influence In Congress and the Economy," NBER Working Paper No. 12751, December 2006.
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