DP1759 Political Economics and Macroeconomic Policy

Author(s): Torsten Persson, Guido Tabellini
Publication Date: December 1997
Keyword(s): Budget Deficits, Credibility, Fiscal Policy, Monetary Policy, Politics
JEL(s): E5, E6, H2, H3, O1
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1759

This paper surveys the recent literature on the theory of macroeconomic policy. We study the effect of various incentive constraints on the policy-making process, such as lack of credibility, political opportunism, political ideology, and divided government. The survey is organized in three parts. Part I deals with monetary policy in a simple Phillips curve model, and focuses on credibility, political business cycles, and optimal design of monetary institutions. Part II deals with fiscal policy in a dynamic general equilibrium set up; the main topics covered in this section are credibility of tax policy, and political determinants of budget deficits. Part III studies economic growth in models with endogenous fiscal policy.