This paper tests the existence and the extent of a politically induced business cycle in the U.S. in the post-World War II period. The cycle described in this paper is different from the traditional "political business cycle" of Nordhaus. It is based on a systematic difference between the monetary policies of the two parties in a model with labor contracts. From an explicit optimization problem we derive a system of equations for output and money growth. Then we successfully test the non-linear restriction imposed by the theory on the parameters of the system of equations. We cannot reject the hypothesis that money growth has been systematically different under the two types of administration and that this difference contributes to explain output fluctuations.

Recent analyses of the gains to policy coordination have focussed on the strategic aspects of macroeconomic policymaking in a static setting. A major theme is that noncooperative policy making is likely to be Pareto inefficient because of the presence of beggar-thy-neighbor policies. This paper extends the analysis to a dynamic setting, thereby introducing three important points of realism to the static game. First, the payoffs to beggar-thy-neighbor policies look very different in one-period and multiperiod games, and thus so do the gains to coordination. Second, we show that policy coordination may reduce economic welfare if governments are nyopic in their policy making, as is sometimes claimed. Third, governments act under a fundamental constraint that they cannot bind the actions of later governments, and we investigate how this constraint alters the gains to policy coordination.

Industrial Economies THE TURBULENT EVENTS in the world economy since 1973 have several times prompted the call for the major countries in the Organization for Economic Cooperation and Development (OECD) to coordinate their macroeconomic policies.I In the immediate aftermath of the 1973 oil We would like to thank Peter Hooper of the Board of Governors of the Federal Reserve System, Stephen Marris and John Williamson of the Institute for International Economics, and members of the Brookings Panel for helpful discussions. Data Resources, Inc., generously made available computer facilities for this study. The paper was written while Gilles Oudiz was a visiting scholar at the Massachusetts Institute of Technology, and he gratefully acknowledges the financial support of the North Atlantic Treaty Organization and the Fulbright fellowship program during this visit. 1. For useful discussions of the policy coordination debate in the context of the economic summit meetings, see George de Menil and Anthony M.

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This paper tests the existence and the extent of a politically induced business cycle in the U.S. in the post-World War II period. The cycle described in this paper is different from the traditional "political business cycle" of Nordhaus. It is based on a systematic difference between the monetary policies of the two parties in a model with labor contracts. From an explicit optimization problem we derive a system of equations for output and money growth. Then we successfully test the non-linear restriction imposed by the theory on the parameters of the system of equations. We cannot reject the hypothesis that money growth has been systematically different under the two types of administration and that this difference contributes to explain output fluctuations.