Political business cycle theory

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Reference no: EM1314074

Political business cycle: Do economic events affect presidential elections? To test this so-called political business cycle theory, Gary Smith²⁰ obtained the following regression results based on the U.S Presidential elections for the four yearly periods from 1928 to 1980.

Y^Λ_t= 53.10 - 1.70X_t

t = (34.10) (-2.67) r² = 0.37

Where Y is the percentage of the vote received by the incumbent and X is the unemployment rate change - unemployment rate in an election year minus the unemployment rate in the preceding year.

1. A prior, what is the expected sign of X?

2. Do the results support the political business cycle theory? Support your contention with appropriate calculations.

3. Do the results of the 1984 and 1988 presidential elections support the preceding theory?

4. How would you compute the standard errors of b₁ and b₂?

Reference no: EM1314074

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