A Computable Equilibrium Model for the Study of Political Economy

Abstract

Theory: The need for the development and use of a concept of joint, political-economic equilibrium is increasingly recognized by students of democracy and markets. Yet, to date, no adequate theoretical and methodological synthesis of this kind has been produced. The few works which have attempted it suffer from a lack of theoretical balance between economic and political theory; unrealistic, temporally aggregated conceptions of political-economic equilibrium; failure to incorporate theoretically meaningful stochastic elements of economic and political processes; and the absence of a coherent methodology for gauging the empirical power of political-economic models. Methods: In the spirit of the AJPS workshop, it is shown how these problems can be solved. An improved model is built, one which fuses a branch of real business cycle theory and the theory of presidential approval. This model produces a notion of computable political-economic equilibrium that provides for market clearing and simultaneous stochastic optimization by economic and political agents. Then, using data analysis techniques developed in parallel by real business cycle theorists (Hansen and Heckman 1996; Kydland and Prescott 1990, 1996; Lucas 1987; Prescott 1986a, 1986b, 1991; Sims 1996) and political methodologists (Brady 1996; Jackson 1995), the model is parameterized for the United States. More specifically, on the basis of estimates from economics and political science and some numerical experimentation, certain of its parameters are set so that, when simulated, the model mimics the United States political economy in the 1980s. Results: The parameterized model is used to study some important counterfactuals. The first is the impact of increased approval volatility on political-economic equilibration. Such volatility is expected in view of America's likely involvement in the post Cold War era's increasing number of low intensity international conflicts. The second is the impact of presidents pursuing relatively high-nonminimum winning-levels of approval. This kind of behavior is attributed to certain presidents along with the claim that it has harmful effects on markets and hence on various facets of social welfare. The former