We hear a lot about how the economy changed under a certain president, but how much does the incumbent actually affect the economy? Are the fluctuations we see in economic growth due to natural market fluctuations or can they be attributed to policy changes?


Here is one paper that may be of interest:

Analyses of the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during Election Day. Analyzing high frequency financial fluctuations following the release of flawed exit poll data on Election Day 2004, and then during the vote count, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.

Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections Snowberg, Wolfers, and Zitzewitz (2006)

This might give some indication of an upper bound on these effects since only some of the increase in stock market wealth is from an increase in aggregate wealth. The rest comes from a change in transfers and so not really an effect on the economy.

Here's a similar paper from Germany:

Rational partisan theory suggests that firms perform better under right- than left-leaning governments. In the pre-election time, investors should anticipate these effects of government partisanship. This is the first study to investigate such anticipated partisan effects in Germany. Applying conditional volatility models we analyze the impact of expected government partisanship on stock market performance in the 2002 German federal election. Our results show that small-firm stock returns were positively (negatively) linked to the probability of a right- (left-) leaning coalition winning the election. Moreover, we find that volatility increased as the electoral prospects of right-leaning parties improved, while greater electoral uncertainty had a volatility-reducing effect.

Partisan politics and stock market performance: The effect of expected government partisanship on stock returns in the 2002 German federal election (Füss, Bechtel (2002))

It also depends on the baseline way of measuring impact. A really terrible president might be able to wreck serious damage on the economy while the other branches and electorate would take time to undo that damage and remove him. Should presidential performance be measured against the very worst that an incompetent or malicious person could deliver? Or are they best compared with other likely serious contenders? These papers above are much more measures of the latter than the former.

  • $\begingroup$ Interesting, but these studies address the impact of anticipated election results on the economy rather than the impact of policy changes on the same. $\endgroup$
    – dramzy
    Aug 11 '15 at 19:57

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