Toward a Political Economy of Macroeconomic Thinking

Abstract

This paper investigates, in a simpli…ed macro context, the joint determina- tion of the (incorrect) perceived model and the equilibrium. I assume that the model is designed by a self-interested economist who knows the true structural model, but reports a distorted one so as to in‡uence outcomes. This model in‡uences both the people and the government; the latter tries to stabilize an unobserved demand shock and will make dierent inferences about that shock depending on the model it uses. The model's choice is constrained by a set of autocoherence conditions that state that, in equilibrium, if everybody uses the model then it must correctly predict the moments of the observables. I then study, in particular, how the models devised by the economists varies depending on whether they are progressive vs. conservative. The predictions depend greatly on the speci…cs of the economy being consid- ered. But in many cases, they are plausible. For example, conservative econo- mists will tend to report a lower keynesian multiplier, and a greater long-term in‡ationary impact of output expansions. On the other hand, the economists' margin of manoeuver is constrained by the autocoherence conditions. Here, a progressive economist who promotes a Keynesian multiplier larger than it really is, must, to remain consistent, also claim that demand shocks are more volatile than they really are. Otherwise, people will be disappointed by the sta- bilization performance of …scal policy and reject the hypothesized value of the multiplier. In some cases, autocoherence induces the experts to make, loosely speaking, ideological concessions on some parameter values. The analysis is illustrated by empirical evidence from the Survey of Professional Forecasters.