Doctoral Dissertation Research in Political Science: Economic Voting Dynamics

University Of Houston, Houston TX

Investigators

Abstract

A highly-regarded economic voting theory examining the electoral effects of monetary policy, the Rational Partisan Theory (RPT), posits that partisan inflation shocks follow the midterm cycle, implying that monetary policy matters in midterm elections but not during on-year elections. Yet, recent empirical evidence shows inflation has become less relevant electorally; instead, unemployment still matters in elections. The nature of the changing electoral dynamics between the two components of monetary policy is unclear, however. In order to solve the puzzle, this study investigates the electoral implications of recent monetary policy developments, in particular, the aggressive inflation stabilization - an understudied area in economic voting research. The intellectual merit of the study lies in its application of recent concepts in macroeconomic policy to understand trends in economic voting. Accordingly, the study develops and integrates theoretical and statistical models to rectify the midterm cycle of inflation under the RPT, and to extend the RPT to examine the partisan effects of unemployment policy. First, through the integration of theoretical and behavioral concept of inflation expectations and the statistical concept of inflation persistence, the study posits inflation stabilization moderates voters' uncertainty of on-year election outcomes, resulting in inflation policy neutrality at midterms. Second, while inflation policy is de-politicized, unemployment policy remains discretionary and is subject to partisan forces. Using a two-dimensional decision-making model of partisan policy and voter perceptions on unemployment severity, the study tests the assumption that voters always reward long-term policy but reward or punish short-term policy based on its performance. Voter behavior, however, is further assumed to be conditioned by income levels. The broader impacts of the study are twofold. First, the emphasis on inflation stabilization has resulted in low inflation since the 1980s. To the extent that economic stability is highly desirable, this "great moderation" of the business cycle is a testament to the success of macroeconomic management. Yet, the policy has its limitations, as we have learned from the 2008 financial crisis. The electoral implications, as this study argues, reflect a monetary policy imbalance: while inflation ceases to be an election issue in recent time, unemployment remains a problem to be solved from time to time. In the absence of an effective monetary policy to stabilize unemployment volatility, the public will continue to turn to the political party in power for answers. Research has shown that inflation stability can contribute to greater output/unemployment stability. The challenge to monetary policymaker, therefore, is on perfecting the policy tool to achieve "inflation-output costabilization", as it did during the 1980s and 1990s. Recent policy measures aiming at reducing unemployment, such as the judicious use of quantitative easing, are consistent with both the refinements to RPT posited above but also with advances made in inflation targeting.