Working Paper: CEPR ID: DP1759
Authors: Torsten Persson; Guido Tabellini
Abstract: 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.
Keywords: politics; monetary policy; fiscal policy; credibility; elections; budget deficits
JEL Codes: E5; E6; H2; H3; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of credibility (D83) | Higher equilibrium inflation (E31) |
| Lack of credibility (D83) | Higher wealth taxes (H29) |
| Political opportunism (D72) | Electoral cycles in inflation (E31) |
| Political opportunism (D72) | Output volatility (C69) |
| Political opportunism (D72) | Inflationary pressures (E31) |
| Political ideology (P16) | Fiscal policies (H30) |
| Political ideology (P16) | Monetary policies (E52) |
| Political ideology (P16) | Economic performance (P17) |