Presidential Saber Rattling and the Economy

Abstract

Saber rattling is a prominent tool of the U.S. president's foreign policy leadership. Yet there has been no study of how presidential saber rattling affects international or domestic political outcomes. This study evaluates how presidential saber rattling affects U.S. economic behavior and performance. Theoretically, the study demonstrates that presidential rhetoric affects the risks that economic actors are willing to take, as well as the consequences of these resulting behaviors for U.S. economic performance. Using monthly time series running from January 1978 through January 2005, vector autoregression methods are applied to show that increased presidential saber rattling produces increased perceptions of negative economic news, declining consumer confidence, lower personal consumption expenditures, less demand for money, and slower economic growth. More broadly, the study demonstrates an important linkage between the president's two most important roles: foreign and economic policy leadership. The president's foreign policy pronouncements not only impact other nations, but also affect domestic economic outcomes.