The New Political Macroeconomics.
reportposted on 16.03.2009, 14:56 by Ali Al-Nowaihi, Dean Garratt
The paper surveys the ‘old’ and ‘new’ political macroeconomics. In the former we consider how governments can be seen to manipulate the economy as to satisfy opportunistic or ideological motives, thereby creating opportunistic or partisan political business cycles. We examine how the macroeconomic revolution of the 1970s cast doubts on the ability of governments to freely and repeatedly create such cycles. Consequently, the new political macroeconomics have focused more on the effect of politically induced incentives on the inherent amount of inflation in the economic system. In exploring the concept of inflation bias we attempt to use ideas from the old political macroeconomics to show how the two strands of literature may complement one another. The paper finishes by focusing on the debate within the new political macroeconomics about the possible trade-off between reduced inflation bias and extra output volatility following the establishment of an independent central bank.