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Elections, Macroeconomic Preferences and Financial Market Constraints

Thursday December 10, 2009, at 14:00
Aula 4 - IBEI
Research seminar
Thomas Sattler (University College Dublin)
Although political economy research suggests that governments retain less room to maneuver in macroeconomic policy, political parties continue to propose economic policies that differ considerably. I examine to what extent the nominal economic policy positions of government parties as stated in their party manifestos differ from the government’s actual economic policy by analyzing financial market reactions to elections in closed and open industrialized economies. If expected actual economic policies of governments continue to diverge, stock prices should decrease after an unexpected success of a nominally left party. Moreover, stocks should decrease more in an open than in a closed economy because capital has better exit options and flows out of the country when inflationary expectations increase. If de facto economic policy positions have converged, the impact of nominal partisanship on stocks vanishes in an open economy because the expected actual economic policies are similar for all governments. The study uses an event study approach and covers elections in industrialized democracies since the 1950s to examine the hypotheses.