Political Economy in Macroeconomics

Originally, economics was called political economy, and those studying it readily accepted that economic decisions are made in a political world. But economics eventually separated itself from politics to pursue rigorous methods of analyzing individual behavior and markets. Recently, an increasing number of economists have turned their attention to the old question of how polit...

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Originally, economics was called political economy, and those studying it readily accepted that economic decisions are made in a political world. But economics eventually separated itself from politics to pursue rigorous methods of analyzing individual behavior and markets. Recently, an increasing number of economists have turned their attention to the old question of how politics shape economic outcomes. To date, however, this growing literature has lacked a cogent organization and a unified approach. Here, in the first full-length examination of how political forces affect economic policy decisions, Allan Drazen provides a systematic treatment, organizing the increasingly influential "new political economy" as a more established field at the highly productive intersection of economics and political science.

Although he provides an extraordinarily helpful guide to the recent explosion of papers on political economy in macroeconomics, Drazen moves far beyond survey, giving definition and structure to the field. He proposes that conflict or heterogeneity of interests should be the field's essential organizing principle, because political questions arise only when people disagree over which economic policies should be enacted or how economic costs and benefits should be distributed. Further, he illustrates how heterogeneity of interests is crucial in every part of political economy. Drazen's approach allows innovative treatment--using rigorous economic models--of public goods and finance, economic growth, the open economy, economic transition, political business cycles, and all of the traditional topics of macroeconomics.

This major text will have an enormous impact on students and professionals in political science as well as economics, redefining how decision makers on several continents think about the full range of macroeconomic issues and informing the approaches of the next generation of economists.

Preface
Introductory Note
PART I: BASIC ISSUES AND TOOLS OF ANALYSIS
What is a Political Economy?
Introduction
Politics and Economics
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Preface
Introductory Note
PART I: BASIC ISSUES AND TOOLS OF ANALYSIS
What is a Political Economy?
Introduction
Politics and Economics
Types of Heterogeneity
All Illustration of Approaches
Plan of the Book
Economic Models for Political Analysis
Introduction
The Principal-Agent Problem
Discrete Time Dynamic Models---Dynamic Programming
The Overlapping Generations Model
Effects of Uncertain Future Policies
Conclusions
Decisionmaking Mechanisms
Introduction
How Much Political Detail?
Choosing Decisionmaking Mechanisms
Direct Democracy
Representative Democracy
Multiparty Systems
Interest Groups and Lobbying
Transaction Cost Politics
Conclusions
PART II: COMMITMENT, CREDIBILITY, AND REPUTATION
The Time-Consistency Problem
Introduction
Capital Taxation
Time Inconsistency as a Conflict of
Interests
The Barro-Gordon Model
Seigniorage Revenue and the Optimum
Quantity of Money
Commitment versus Flexibility
Conclusions
Laws, Institutions, and Delegated Authority
Introduction
Laws, Constitutions, and Social Contracts
Delegation of Authority
Central Bank Independence
Fiscal Structures for Time Consistency
Conclusions
Credibility and Reputation
Introduction
Reputation
``Reputation'' under Complete Information
Reputation under Incomplete
Information---Mimicking
Does Reputation ``Solve'' the
Time-Consistency Problem?---Three Caveats
Signaling
Reputation for Not Reneging on Commitments
Credibility and External Circumstances
Ambiguity, Secrecy, and Imprecise Control
Conclusions
PART III: HETEROGENEITY AND CONFLICTING INTERESTS
Elections and Changes of Policymakers
Introduction
Elections and Policymaker Performance
The Opportunistic Political Business Cycle
Partisan Political Cycles
Competence and Prospective Voting
Campaign Promises
Interactions of the Executive and the
Legislature
Multiparty Systems and Endogenous Election
Dates
Tying the Hands of One's Replacement
Conclusions
Redistribution
Introduction
Redistribution of Income
Differential Transfers
Nonmonetary Redistribution
Rent Seeking and Predation
Intergenerational Redistribution
Redistribution and Mobility
Conclusions
Public Goods
Introduction
Public Goods---The Neoclassical Approach
Provision of Public Goods in Practice
Voluntary Provision of Public Goods---Free
Riders and Collective Action
Voluntary Provision of Public Goods---Clubs
The Static Public Goods Game
The War of Attrition in Public Goods Provision
Conclusions
Inaction, Delay, and Crisis
Introduction
Economic Arguments
Vested Interests
Nonadoption Due to Uncertainty about
Individual Benefits
``Communication'' Failures
Conflict over the Burden of Reform
Common Property Models
Economic Crises
Conclusions
PART IV: APPLICATION TO POLICY ISSUES
Factor Accumulation and Growth
Introduction
Basic Models of Fiscal Policy and Capital Accumulation
Imperfect Capital Markets, Externalities,
and Endogenous Income Distribution
Political Institutions and Regimes
Socio-Political Instability
Empirical Determinants of Growth
Conclusions
The International Economy
Introduction
PART I Exchange-Rate Arrangements
Fixed versus Flexible Exchange Rates
Currency Crises and Contagious Speculative Attacks
Monetary Unions
PART II Macroeconomic Interdependence
International Policy Cooperation
Political Responses to External Shocks
PART III International Capital and Aid Flows
Capital Controls
Sovereign Borrowing
Foreign Aid
Conclusions
Economic Reform and Transition
Introduction
Defining the Issues
Economic and Political Constraints
The Implications of Magnitude---A Formal Analysis
Heterogeneity and Political Constraints
Labor Reallocation
Privatization
Price Liberalization
Conclusions
The Size of Government and the Number of Nations
Introduction
The Scope of Government
The Size of Government---Government Spending
Government Debt and Deficits
Budgetary Rules and Institutions
The Number of Nations
Conclusions
Bibliography
Author Index
Subject Index
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