Elections and Markets: The Effect of Partisanship, Policy Risk, and Electoral Margins on the Economy

35 Pages Posted: 20 Aug 2007

See all articles by James H. Fowler

James H. Fowler

UC San Diego Division of Social Sciences; UC San Diego School of Medicine

Abstract

Rational partisan theory's exclusive focus on electoral uncertainty ignores the importance of policy uncertainty for the economy. I develop a theory of policy risk to account for this uncertainty. Using an innovative measure of electoral probabilities based on Iowa Electronic Markets futures data for the U.S. from 1988-2000, I test both theories. As predicted by rational partisan theory, positive changes in the probability that the Left wins the Presidency or the Congress lead to increases in nominal interest rates, implying that expectations of inflation have increased. As predicted by the policy risk theory, positive changes in the electoral probability of incumbent governments and divided governments lead to significant declines in interest rates, implying that expectations of inflation risk have decreased. And as an extension to both theories, I find that electoral margins matter for the economy--partisan and policy risk effects depend not only on which party controls the government, but how large its margin of victory is.

Suggested Citation

Fowler, James H., Elections and Markets: The Effect of Partisanship, Policy Risk, and Electoral Margins on the Economy. Journal of Politics, Vol. 68, No. 1, pp. 89-103, February 2006. Available at SSRN: https://ssrn.com/abstract=1007994

James H. Fowler (Contact Author)

UC San Diego Division of Social Sciences ( email )

9500 Gilman Drive
Code 0521
La Jolla, CA 92093-0521
United States

HOME PAGE: http://jhfowler.ucsd.edu

UC San Diego School of Medicine ( email )

9500 Gilman Drive
MC 0507
La Jolla, CA 92093
United States

HOME PAGE: http://jhfowler.ucsd.edu

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