Political Economics and Macroeconomic Policy*
by
Torsten Persson and Guido Tabellini
October 17, 1997
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: it covers credibility issues, 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 here 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, budget deficits
JEL classification numbers: E5, E6, H2, H3, O1