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A Baseline Model of Behavioral Political Cycles and Macroeconomic Fluctuations

Author

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  • Corrado Di Guilmi

    (University of Technology Sydney)

  • Giorgos Galanis

    (School of Business and Management, Queen Mary University of London.)

  • Christian Proaño

    (University of Bamberg)

Abstract

Although the rational choice approach remains the theoretical modeling paradigm in economics and political sciences, the relevance of behavioral factors such as heuristics and biases has been increasingly acknowledged in both fields over the last decades. Against this background, and in honor the lifetime work of Peter Flaschel, we set up a baseline political-macroeconomic model of the Keynes-Metzler-Goodwin (KMG) variety enhanced with endogenous political choices as in Di Guilmi and Galanis (2021). The mutual feedback between the political and the macroeconomic spheres, generated by our framework, gives rise to cyclical dynamics around moving long-term trends for certain parameter constellations. The results of both the stability analysis and the simulations illustrate the existence of multiple political equilibria in the presence of endogenous electoral presences resulting from the crucial role of income distribution not only as a determinant of aggregate investment and aggregate output, but also, of the political climate.

Suggested Citation

  • Corrado Di Guilmi & Giorgos Galanis & Christian Proaño, 2022. "A Baseline Model of Behavioral Political Cycles and Macroeconomic Fluctuations," Working Papers 106, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    • Handle: RePEc:cgs:wpaper:106
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    More about this item

    Keywords

    Behavioral Macroeconomics; Disequilibrium; Discrete Choices; Macroeconomic Fluctuations; Political Cycles; Polarization;
    All these keywords.

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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