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Endogenous Stabilization in Open Democracies

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  • David Kiefer
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    Abstract

    In the new Keynesian theory of endogenous stabilization governments react quickly to lean against the macroeconomic wind. In open economies policymaking is complicated by concern about the trade balance. We extend the political business cycle model by assuming that governments have objectives with respect to macroeconomic performance with respect three indicators (growth, inflation and the net exports), but are constrained by an augmented Phillips curve and the inverse relation between net exports and domestic output. As long as adaptive expectations replace rational ones, econometric tests support this characterization of the political-economic equilibrium, and suggest how it is conditioned by political ideology and central bank independence.

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    Bibliographic Info

    Paper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2006_01.

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    Length: 26 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:uta:papers:2006_01

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    Keywords: Political business cycle; open economy; adaptive expectations;

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    1. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
    2. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
    3. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August.
    4. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
    5. David Kiefer, 2005. "Partisan stabilization policy and voter control," Public Choice, Springer, vol. 122(1), pages 115-132, January.
    6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    7. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
    8. Alesina, Alberto & Roubini, Nouriel, 1992. "Political Cycles in OECD Economies," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 663-88, October.
    9. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
    10. Roubini, Nouriel & Alesina, Alberto, 1992. "Political Cycles in OECD Economies," Scholarly Articles 4553025, Harvard University Department of Economics.
    11. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
    12. Chappell, Henry W, Jr, 1983. "Presidential Popularity and Macroeconomic Performance: Are Voters Really So Naive?," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 385-92, August.
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