Political Elections as a Test of Macroeconomic Theory: Evidence from the 2015 U.K. General Election
18 Pages Posted: 18 May 2015
Date Written: May 12, 2015
Standard zero-lower-bound New Keynesian models generate large fiscal multipliers and expansionary negative supply shocks. Thus, according to these models, a political party that implements fiscal contraction coupled with policies to increase aggregate supply should unambiguously cause economic contraction, compared to a party that implements the opposite policies. I test this prediction using high-frequency prediction- and financial-market data from the night of the 2015 U.K. election, which featured two such parties. By analysing financial-market movements caused by clearly exogenous changes in expectations about the election winner, I find that market participants expected higher equity prices and a stronger exchange rate under a Conservative Prime Minister than under a Labour P.M. There were little to no partisan differences in interest rates, expected inflation, or commodity prices. These results cast doubt on the empirical validity of zero-lower-bound New Keynesian models.
Keywords: Political Elections, Zero Lower Bound, Stock Prices, New Keynesian, Fiscal Multiplier, Aggregate Supply
JEL Classification: E12, E62, G12, G13, G14, H50, H6
Suggested Citation: Suggested Citation