Working Paper: NBER ID: w2213
Authors: Warwick McKibbin; Nouriel Roubini; Jeffrey Sachs
Abstract: The goal of this paper is to study the problem of optimal dynamic policy formulation with competing political parties. We study a general class of problems, in which the two competing political parties have quadratic intertemporal objective functions, and in which the economy has a linear structure and a multidimensional state space. For the general linear quadratic problem we develop a numerical dynamic programming algorithm to solve for optimal policies of each party taking into account the party's objectives; the structure of the economy ; the probability of future election results; and the objectives of the other political party.
Keywords: dynamic optimization; political parties; macroeconomic policy
JEL Codes: D72; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Party affiliation (D72) | Macroeconomic policy outcomes (E60) |
| Probability of reelection (D79) | Inflationary behavior of parties (E31) |
| Current inflation rates (E31) | Expected utility for political parties (D79) |
| Expected utility for political parties (D79) | Future policy decisions (D78) |