Abstract
This paper examines the validity of the political business cycle theory as a description of the macroeconomic policy process in the United States. It considers the ability of incumbent presidents to enhance their approval ratings by manipulating monetary and fiscal tools. The first section estimates the potential political gains from economic expansion and finds that the stimulus needed to produce even small popularity gains is substantial. The second section examines the extent to which government economic policy has been influenced by the political environment. Reaction functions for various policy instruments are estimated, and the results are shown to cast substantial doubt on the importance of the political business cycle hypothesis as an explanation of macroeconomic policy.
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