Macroeconomic Movements, Political Factors and Importance of the Institutions

This paper examines the relation between macroeconomic conditions, policy making and political instability. Policymakers can stimulate aggregate demand prior to the elections in order to improve their chances to be reelected. Political instability induces macroeconomic instability, specially by policymakers′ „opportunistic“ and „partisan“ motivation in condacting economic policy. Politicians choose „opportunistic“ policies to remain in office. They are more informed about their own competence than the citizens are. As a result, politicians can manipulate by the economic policy. On the other hand, we can assume that different parties have different economic goals. Left-wing parties are more concerned about unemployment, and the right-wing parties are more concerned with inflation relative to growth and unemployment. In such conditions, institutions have important role in reducing political influence on the policy making. High level of independence of the central bank is the important element of the institutional climate needed for macroeconomic stability.