In Essay One, the rational partisan business cycle (RPBC) theory is tested in three ways. First, using U.S. real output data for the period 1880-1948. It is found that the theory is not rejected for the period 1914-1948. Second, by exploiting the implications of the theory for the term structure of interest rates. Post-WW2 U.S. data on interest rates is found to be in conformity with the RPBC hypothesis. Third, the theory is extended to encompass the case of nations which have variable inter-election periods, and is successfully tested using output data for Canada and the United Kingdom.
In Essay Two, empirical evidence on a number of political theories of public debt determination is presented. First, it is shown that during the Great Depression, budget deficit persistence was more marked in nations with coalition governments, in accord with the power dispersal theory. Second, Granger-prediction tests are used to test whether large deficits predict future government spending in a sample of industrialized democracies. Finally, a pooled cross-section time series regression analysis reconfirms previous findings that power dispersal is a factor in explaining post-1973 budget deficit persistence in a number of countries but it is also found that the degree of central bank independence is a significant influence.