The political monetary business cycle: Political reality and economic theory

This paper addresses the issue of expectations incorporated into political business cycle models. Rational agents anticipate Democratic efforts to stimulate the economy via monetary policy, discounting money supply from the calculations for determining output variance, so that output under Democrats is wholly unaffected by changes in the money supply. Rational agents appear to be naive about Republicans, incorporating money supply into the calculations for determining output variance, so that output under Republicans is significantly related to money supply.