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Policy rules and political polarization

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  • Hefeker, Carsten
  • Neugart, Michael

Abstract

We develop a model to analyze policymakers’ incentives to install policy rules, comparing the case of no rule with a binding and a contingent policy rule that allows policymakers to suspend the rule in response to a sufficiently large shock. First, abstracting from political polarization, we show that the choice of the policy rule depends on policymakers’ policy targets. Depending on the policy target, there is an unambiguous ranking going from a no-rule regime to a contingent rule to a binding rule. Next, allowing for political polarization, the incentive to install the different types of rules changes with political polarization between different policymakers and their probability of being elected into office. Increasing political polarization when there is a sufficiently high election probability for policymakers with a high policy target increases the preference for more binding policy rules. It also leads to stricter rules in a contingent rule regime.
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Suggested Citation

  • Hefeker, Carsten & Neugart, Michael, 2024. "Policy rules and political polarization," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 149262, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:149262
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/149262/
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    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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