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Endogenous Stabilization in Open Democracies

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  • David Kiefer

Abstract

In the new Keynesian theory of endogenous stabilization governments react quickly to lean against the macroeconomic wind. In open economies policymaking is complicated by concern about the trade balance. We extend the political business cycle model by assuming that governments have objectives with respect to macroeconomic performance with respect three indicators (growth, inflation and the net exports), but are constrained by an augmented Phillips curve and the inverse relation between net exports and domestic output. As long as adaptive expectations replace rational ones, econometric tests support this characterization of the political-economic equilibrium, and suggest how it is conditioned by political ideology and central bank independence.

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  • David Kiefer, 2006. "Endogenous Stabilization in Open Democracies," Working Paper Series, Department of Economics, University of Utah 2006_01, University of Utah, Department of Economics.
    • Handle: RePEc:uta:papers:2006_01
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    File URL: http://economics.utah.edu/research/publications/2006_01.pdf
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    2. David Kiefer, 2005. "Partisan stabilization policy and voter control," Public Choice, Springer, vol. 122(1), pages 115-132, January.
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    More about this item

    Keywords

    Political business cycle; open economy; adaptive expectations;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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