Disposable income, unemployment, inflation and state spending in a dynamic political-economic model

F. Ploeg

Public Choice, 1989, vol. 60, issue 3, 239 pages

Abstract: This paper formulates a medium-term macroeconomic model of disposable income, unemployment, inflation and state spending, proposes a theory of qualitative choice to explain electoral popularity in terms of these variables and develops three approaches to the formulation of political-economic policy. The first approach is static, sets the tax rate to reconcile the interests of various pressure groups and yields a political trade-off between the private and public sector. The second approach relies on maximizing the probability of winning the next election and gives rise to a political business cycle unless the electorate votes strategically. The implications of crowding out of private investment under alternative monetary rules, autonomous behaviour of the state bureaucracy and tax-indexation for the political business cycle are also examined. The third approach analyzes the objective of maximizing the uninterrupted length in office. It yields a short-run political cycle superimposed on a longer cycle. Copyright Kluwer Academic Publishers 1989

Date: 1989
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DOI: 10.1007/BF00159395

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