Politico-economic Models Research Articles

Italy and Germany: Incompatible Varieties of Europe or Dissimilar Twins?

This article critically examines the main assumptions underlying the reforms embedded in EMU and European Semester recommendations. We proceed in three steps. First, we question the notion that Italy and Germany embody two distinctive politico-economic models and challenge the conclusion, drawn from this assumption, that structural rigidities are the primary cause of Italy’s economic woes and that its lackluster performance since the 1990s is due to its insufficient determination to implement structural reforms. Rather we show, second, that both countries have undertaken remarkably similar reforms which, however, have yielded different results both because of the different public debt levels they started with and because the interdependence created by the euro and the hyper-financialised markets rewarded those countries with low, and penalises those with high, sovereign debt. Third, we contest the assumption that the two economies would converge towards a common growth path if only Italy could adapt to the requirements of a globalised economy like Germany has apparently done, which leads us, in conclusion, to question the appropriateness of the EU’s current strategy for both.

Introduction to ‘Italy and Germany: Incompatible Varieties of Europe?’

This article introduces the questions that motivate this special issue: the growing divergence among Eurozone member states and the overall disappointing performance of the Eurozone as a whole. It justifies the choice of Germany and Italy as the two countries that can best exemplify what are considered, respectively, the northern and southern politico-economic models coexisting in the Eurozone and proposes an approach to these questions that deviates from the mainstream. It argues that comparing the performance of Eurozone member economies as if they were independent of one another prevents an accurate assessment of the externalities created by the common currency and claims that microeconomic solutions to macroeconomic problems have the effect of reinforcing the divergence, rather than attenuating it. Incorporating the insights drawn from the detailed analysis of the various aspects of the German and Italian models provided by the contributors to this special issue, it concludes by assessing the likely impact of the impending reform of EMU.

Understanding the Rural Landscape of Late Bronze Age Cyprus

For Late Bronze Age (LBA) Cyprus (ca. 1680/1650–1100 bc), while there is a long tradition of classifying both excavated and surveyed sites into types or tiers based on their estimated size, proximity to resources and each other, it is largely the excavated coastal sites that have formed the basis for politico-economic models of interpretation. As such, less attention has been given to other site types, which may have influenced and potentially contributed to the development of Cypriot society and economy in meaningful ways. Within the context of those sites, while it is widely argued that inland agricultural settlements operated as a subsistence base for miners located near the Troodos copper sources and specialists residing in the urban centres, little is known of the material culture and socioeconomic significance of the rural landscape. Rural populations are often assumed to be an amorphous, unempowered mass, fuelling centrally controlled, urban-driven systems. In order to assess and thus to expand our understanding of the character and role of this population group, and to reconsider the socioeconomic relations underpinning the Cypriot LBA rural landscape, this study engages with theoretical approaches to issues of peasantry and countryside in the Mediterranean. Subsequently, with emphasis on regional survey data from the Vasilikos Valley of Cyprus’s south-central coast, a Geographic Information Systems (GIS) environment is used to explore the spectrum of socioeconomic behaviour between a subservient rural support base for specialised urban production and an independent economic agency.

Politico-Economic Models of Democracy in Democracy Promotion

This piece examines the curious nature of the conceptual foundations of current democracy promotion practice. I point out that while it is broadly accepted today that a liberal democratic politico-economic model should stand at the heart of democracy promotion, the scholarly literature on democracy–capitalism relationship stands in sharp contrast to this consensus in highlighting the contested nature of this relationship. Through a survey of some of the key theoretical texts on capitalism and democracy, and a brief empirical survey of politico-economic contours of current democracy promotion, this article highlights the poorly thought-through links between capitalism and democracy in current democracy promotion. It is argued here that un-reflexive conjoining of democracy and liberal capitalism and sidestepping of the plurality of nuanced positions on this relationship in scholarly literature is problematic and that revisiting the lines of contestation over the relationship between capitalism and democracy is deeply consequential for re-evaluating and revising democracy and market promotion policies in the current context of “dual crisis” facing democracy promoters today.

The Political Economy of Labor Subsidies

We explore a political economy model of labor subsidies, extending Meltzer and Richard's median voter model to a dynamic setting. We explore only one source of heterogeneity: initial wealth. As a consequence, given an operative wealth effect, poorer agents work harder, and if the agent with median wealth is poorer than average, a politico-economic equilibrium will feature a subsidy to labor. The dynamic model does not have capital, but it has perfect markets for borrowing and lending. Because tax rates influence interest rates, another channel for redistribution appears, since a decrease in current interest rates favors agents with a negative (below-average) asset position.By the same token — and as is typically the case in dynamic politico-economic models with rational agents — the setting features time-inconsistency: the median voter would like to commit to not manipulating interest rates in the future. Under commitment, and under the assumption that preferences admit aggregation, we show that labor subsidies subsist only for one period; after that, subsidies are zero. That is, under commitment, the median voter takes advantage of the voting power once and for all. His wealth moves closer to that of the mean (which is zero), but afterwards he refrains voluntarily from further subsidization. Under lack of commitment, which we analyze formally by looking at the Markov-perfect (time-consistent) equilibrium in a game between successive median voters in the same environment. Instead, subsidies persist — they are constant over time — and are more distortionary than under commitment. Moreover, in the situation without commitment, the median voter does not manage to reduce asset inequality, unlike in the commitment case.

SATISFICING AND SEQUENTIAL TARGETS IN ECONOMIC POLICY: A POLITICO-ECONOMIC APPROACH

The standard optimising framework has difficulties in explaining macroeconomic policy phenomena in some countries, such as long-term spiralling public debts and sequential setting of policy targets. Moreover, it has not responded convincingly to some common criticisms, such as the question of symmetry, and the failure to account for the existence of policy-lobbying groups. This paper suggests that a satisficing approach to economic policy is a possible way of accommodating all the above. This approach combined with priority target setting has been used in other social sciences. It concentrates on the concepts of sequential attention to policy objectives and 'satisfactory' macroeconomic targets. It also provides a choice theoretical framework as a foundation of the satisficing approach to economic policy. A simple example of a satisficing sequential target model is presented. There is also an attempt to link other alternative approaches, such as politico-economic models, with this framework. Copyright 2004, Oxford University Press.

The New Political Macroeconomics: An Interview with Alberto Alesina

Interviews economics professor Alberto Alesina from Harvard University regarding political macroeconomics. Educational background; Views on Keynesian economics; Contributions of Hibbs to the development of politico-economic models; Evidence against the median voter theorem; Weaknesses of rational partisan theory; Type of political system that is most conducive to macroeconomic stability..

On Central Bank Independence and the Stability of Policy Targets

It is argued that impediments to the establishment of an independent central bank arise in the presence of unstable policy targets. Changing policy targets may occur with an office‐motivated policymaker. This differs from politico‐economic models where targets change depending on the partisanship of the politicians in office. In the model the principal faces a tradeoff between the credibility benefits of an independent central bank and the flexibility to pursue shifts in his policy targets allowed by a regime of policy discretion. An empirical section addresses the issue of the correlation between central bank independence and the stability of policy targets.

Political business cycles: the political economy of money, inflation, and unemployment

Foreword / Axel Leijonhufvud xv Introduction and Summary / Patricia Dillon and Thomas D. Willett 1 Part One: The Political and Economic Causes of the Great Stagflation 1. Explaining the Great Stagflation: Toward a Political Economy Framework / Thomas D. Willett and King Banaian 35 2. Inflation and Politics: Six Theories in Search of Reality / William Mitchell 63 3. Models of the Political Process and Their Implications for Stagflation: A Public Choice Perspective / Thomas D. Willett and King Banaian 100 Appendix: An Overview of Political Business Cycles / King Banaian 116 4. The Keynesian Legacy: Does Countercyclical Policy Pay Its Way? / Thomas Mayer 129 5. Wage and Price Rigidities, Supply Restrictions, and the Problem of Stagflation / Gottfried Haberler 145 6. The Inflation Tax / J. Harold McClure Jr. and Thomas D. Willett 177 7. The Decline of Gold as a Source of U.S. Monetary Discipline / John Briggs, D. B. Christenson, Pamela Martin, and Thomas D. Willett 186 8. Inflation Hypothesis and Monetary Accommodation: Postwar Evidence from the Industrial Countries / Thomas D. Willett, King Banaian, Leroy O. Laney, Mohand Merzkani, and Arthur D. Warga 200 Part Two. The Political Business Cycle 9. Politico-Economic Models of Macroeconomic Policy: A Review of the Empirical Evidence / Friederich Schneider and Bruno S. Frey 239 10. Does the Political Business Cycle Dominate U.S. Employment and Inflation? Some New Evidence / Stephen E. Haynes and Joe Stone 276 11. Political Business Cycles and the Capital Stock: Variations on an Austrian Theme / Peter Lewin 294 Part Three. The Political Economy of Monetary Policy 12. Problems Inherent in Political Money Supply Regimes: Some Historical and Theoretical Lessons / Lawrence H. White 301 13. Two Monetary and Fiscal Policy Myths / Thomas Havrilesky 320 14. Monetary Policy: The Rhetoric versus the Record / Raymond E. Lombra 337 15. Politics and Monetary Policy / Nathaniel Beck 366 Part Four. Proposals for Reform 16. Evaluating Proposals fro Fundamental Monetary Reform / Thomas Mayer and Thomas D. Willett 398 17. Fiat Money and the Constitution: A Historical Review / Gregory B. Christainson 424 18. Monetary Confidence, Privately Produced Monies, and Domestic and International Monetary Reform / Michael Melvin 435 19. Depoliticizing the Supply of Money / Lawrence H. White 460 20. Fedbashing and the Role of Monetary Arrangements in Managing Political Stress / Edward J. Kane 479 21. Subordinating the Fed to Political Authorities Will Not Control Inflationary Tendencies / King Banaian, Leroy O. Laney, John McArthur, and Thomas D. Willett 490 Index 509

Macroeconomics and Politics

The recent game-theoretic macroeconomic literature provides a useful tool for analyzing the relationship between political institutions and the macroeconomy. In particular, this paper examines two related issues: the effects of electoral competition on macroeconomic policy and on the economic cycle, and the role of different degrees of independence of the Central Bank as a determinant of monetary policy. The game-theoretic literature in this area has generated several results that are consistent with the empirical evidence. This claim is supported by reviewing the available empirical results and by performing several new tests. In particular, this paper emphasizes the different empirical implications of rational and optimizing politico-economic models in respect to non-rational approaches. Several open issues and new directions of research are also explored in the conclusions.

Macroeconomics and Politics

The recent game-theoretic macroeconomic literature provides a useful tool for analyzing the relationship between political institutions and the macroeconomy. In particular, this paper examines two related issues: the effects of electoral competition on macroeconomic policy and on the economic cycle, and the role of different degrees of independence of the Central Bank as a determinant of monetary policy. The game-theoretic literature in this area has generated several results that are consistent with the empirical evidence. This claim is supported by reviewing the available empirical results and by performing several new tests. In particular, this paper emphasizes the different empirical implications of rational and optimizing politico-economic models in respect to non-rational approaches. Several open issues and new directions of research are also explored in the conclusions.

Reinterpreting the role of inflation in politico-economic models

The author attempting to analyze the interplay between politics and economics is faced with a large number of problems, ranging from an always too small and idiosyncratic data set to the lack of any generally accepted theory of the process which has testable implications. My aims have been (1) to show that past studies have typically treated inflation in an extremely naive way, disregarding the fact that it may have political pluses if unanticipated, and (2) to test the sensitivity of established formulations to what I believe is the more useful view of voter behavior given in Model II. Since Model I and Model II represent polar extremes of amnesiac and eidetic behavior, tests of intermediate lag structures are clearly in order. Because of administration peculiarities, however, lost data points will pose a serious problem.

State and prospect of public choice: A European view

The victory of Public Choice may not yet have arrived, and the share of European contributions may still be small. It has nevertheless been argued that there is a great future in Public Choice. Three especially promising areas have been indicated by way of example: the theory of economic policy, politico-economic models; and International Political Economy.

政治経済連動モデルの問題と展望

政治経済連動モデルの問題と展望

“Politico-economic Models in Competition with Alternative Models: Which Predict Better?”

“Politico-economic Models in Competition with Alternative Models: Which Predict Better?”

Keynesian Thinking in Politico-Economic Models

Keynesian Thinking in Politico-Economic Models

Politico-economic models and cycles

Studies are surveyed analyzing the mutual interaction of economy and polity in an empirically testable way. A wide variety of assumptions are made concerning the behaviour of economic and political decision-makers–in particular voters and government, as well as the economic and political sectors. Representative models are discussed considering steady state equilibria and political business cycles, and empirical results are presented for the U.S., the U.K. and Germany. Finally, the potential and prospects of politico–economic modelling are discussed.

The Effects of Economic Policies on Votes for the Presidency: Some Evidence from Recent Elections

THREE strands of thought and conjecture contribute to the belief that economic conditions play an important, and perhaps decisive role in elections. Recent theories of rational voting behavior-Buchanan and Tullock' or Riker and Ordeshook2 are examples-treat votes and voting as the outcome of a rational calculation of marginal costs and benefits. Prosperity, rising real income and increased employment may, in this framework, yield benefits to the individual that can be translated into votes for the party or candidate. Related, yet distinct, is the growing body of conjectures about a "political business cycle." High employment and low inflation in election years are followed by anti-inflation policies that temporarily lower employment and the rate of inflation in succeeding years. These policies work gradually and are replaced by policies to stimulate the economy, so the candidate or party can boast of prosperity and lower inflation at the next election. The conjecture arises also from casual and impressionistic evidence and from some studies of voting. Perhaps the most widely cited recent example is the Kennedy-Nixon election of 1960 when a small plurality and rising unemployment seemed to support the conjecture. Econometric studies of voting behavior provide, at most, mixed support. Most of the evidence comes from time series studies of Congressional elections. Kramer, Stigler, and Arcelus and Meltzer used different methods and reached different conclusions.3