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Alternation of parties in power and economic volatility: testing the rational partisan hypothesis and policy learning hypothesis

Steven Hall () and Misa Nishikawa
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Steven Hall: Ball State University
Misa Nishikawa: Ball State University

Economics of Governance, 2018, vol. 19, issue 2, 91-118

Abstract: Abstract Right and left parties have distinct macroeconomic preferences that could create different levels of volatility during their executive tenures. But rational partisan theory argues that, because actors in the economy anticipate ruling party behavior, partisan differences only matter when election outcomes are uncertain. We argue that policy risk from ruling parties extends beyond elections, leading to important variation in growth volatility that occurs during a ruling party’s tenure. Building on theories of policy risk and learning, we argue that after elections, economic actors still face uncertainty about the policies of new ruling parties. With time in power, new ruling parties build policy track records, reducing policy risk and, thus, volatility. We estimate a learning curve model of ruling party duration’s effect on the variation in quarterly GDP growth rates. Using data from 44 democracies between 1981 and 2009, we find that learning processes extend beyond the conclusion of uncertain elections.

Keywords: Economic volatility; Policy risk; Rational partisan hypothesis; Ruling party duration (search for similar items in EconPapers)
Date: 2018
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