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A Computable Equilibrium Model for the Study of Political Economy

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  • Freeman, John R.
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    Abstract

    Despite much hard work in recent years, economics and political science remain largely separate disciplines. Few meaningful bridges have been build between them, and hence useful gains from intellectual trade between the two have not been realized. Some of the most recent efforts to construct such a bridge are critically evaluated. It is shown that this literature suffers from a lack of theoretical balance between economic and political theory; unrealistic, temporally aggregated conceptions of political-economic equilibrium; failure to incorporate theoretically meaningful stochastic elements of economic and political processes; and the absence of a coherent methodology for gauging the empirical power of political-economic models. In the spirit of the AJPS workshop, it is shown how these problems can be solved. An improved model is built, one which fuses a branch of real business cycle theory and the theory of Presidential approval. This model produces a notion of computable political-economic equilibrium which provides for market clearing, and simultaneous stochastic optimization by economic and political agents. Then, using data analysis techniques developed in parallel by real business cycle theorists (Lucas, 1981, Prescott, 1986, 1991, Kyland and Prescott 1990, 1991) and political methodologists (Brady, forthcoming; Jackson, 1995)) the model is calibrated for the U.S. It is demonstrated that the calibrated model mimics the data for the U.S., that is, when simulated, the model produces time series which when appropriately detrended have properties which are very similar to those of detrended actual data for the sample period. Finally, the model is used to study some important counterfactuals. One of these is the impact of the increase in approval volatility that the new world order is likely to spawn; the other is an assessment of the impact of Presidents pursuing relatively high--nonminimum winning--levels of approval. In these ways, a better bridge is constructed between the two disciplines and valuable insights are gained into the interplay of democracy and markets.

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    Bibliographic Info

    Paper provided by University of Minnesota, Economic Development Center in its series Bulletins with number 7484.

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    Date of creation: 1996
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    Handle: RePEc:ags:umedbu:7484

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    Keywords: Political Economy;

    References

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    1. Finn E. Kydland & Edward C. Prescott, 1990. "The econometrics of the general equilibrium approach to business cycles," Staff Report 130, Federal Reserve Bank of Minneapolis.
    2. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
    3. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
    4. Miller, Preston J & Roberds, William T, 1991. "The Quantitative Significance of the Lucas Critique," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(4), pages 361-87, October.
    5. Ayse Imrohoroglu & Edward C. Prescott, 1991. "Evaluating the welfare effects of alternative monetary arrangements," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-10.
    6. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
    7. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
    8. Hinich, Melvin J., 1977. "Equilibrium in spatial voting: The median voter result is an artifact," Journal of Economic Theory, Elsevier, vol. 16(2), pages 208-219, December.
    9. Peter Brandner & Klaus Neusser, 1992. "Business cycles in open economies: Stylized facts for Austria and Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(1), pages 67-87, March.
    10. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
    11. Coughlin, Peter & Nitzan, Shmuel, 1981. "Electoral outcomes with probabilistic voting and Nash social welfare maxima," Journal of Public Economics, Elsevier, vol. 15(1), pages 113-121, February.
    12. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
    13. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
    14. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
    15. Javier Diaz-Gimenez & Edward C. Prescott & Terry Fitzgerald & Fernando Alvarez, 1992. "Banking in computable general equilibrium economies," Staff Report 153, Federal Reserve Bank of Minneapolis.
    16. Barnett,William A. & Schofield,Norman & Hinich,Melvin (ed.), 1993. "Political Economy: Institutions, Competition and Representation," Cambridge Books, Cambridge University Press, number 9780521417815, November.
    17. Londregan, John & Alesina, Alberto, 1993. "A Model of the Political Economy of the United States," Scholarly Articles 4552529, Harvard University Department of Economics.
    18. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
    19. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
    20. Fernando Alvarez & Terry Fitzgerald, 1992. "Banking in computable general equilibrium economies: technical appendices I and II," Staff Report 155, Federal Reserve Bank of Minneapolis.
    21. Rodolfo E. Manuelli, 1986. "Modern business cycle analysis: a guide to the Prescott-Summers debate," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-8.
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