Political Economics and Macroeconomic Policy

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 and focuses on credibility, 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 covered in this section are credibility of tax policy and political determinants of budget deficits. Part III studies economic growth in models with endogenous fiscal policy