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Roberts: Political institutions, policy expectations, and the 1980 elections

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Roberts. 1990. Political institutions, policy expectations, and the 1980 elections: A financial market perspective. American Journal of Political Science 34: 289-310.

Studies of Congress-President relations have not been able to say that one branch is consistently dominant. The dominance shifts as the key personalities in each branch change. Many people say the "Reagan Revolution" began a new period of executive dominance, after the Congress asserted its dominance following Nixon's impeachment. The point: He looks at the election to see whether financial markets responded more to Reagan's plans for huge defense spending or the Senate Republicans' fiscal conservatism.

Prediction 1: A direct relationship between the probability that Reagan would win and expected increases in defense spending (reflected in value of relevant assets).

Senate elections: although analysts widely predicted some slippage in the Democratic majority, none expected the Republicans to gain 12 seats and, therefore, a majority. Until the day after the election, nobody thought that the Republicans would control the Senate.

Prediction 2: With the sudden realization that the Republicans would control the Senate, a "change in expectations about the future course of defense policy, independent of the election of Ronald Reagan, is predicted. The expected direction of these assessed policy changes is toward greater support for increased military spending."

Thus, the point of the two predictions: People were fairly sure that Reagan would win the presidency, but he would face a Democratic Congress. Thus, the financial markets would have already responded to Reagan's expected influence on policy. However, the unexpected victory of Republicans in the Senate meant that the financial markets would respond to that victory only after the election. Thus, the financial markets responded separately to these two victories: a preemptive response to Reagan's victory, and a reactive response to the Republicans'.

A threat: how will he control for the interactive effect of having the two branches controlled by the same party?