Endogenous Stabilization in Open Democracies

David Kiefer

Working Paper Series, Department of Economics, University of Utah from University of Utah, Department of Economics

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.

Keywords: Political business cycle; open economy; adaptive expectations (search for similar items in EconPapers)
JEL-codes: E52 E63 F41 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:uta:papers:2006_01

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