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Macroeconomic Policy in a Two-Party System as a Repeated Game

Macroeconomic Policy in a Two-Party System as a Repeated Game Abstract This paper considers the interaction of two parties with different objectives concerning inflation and unemployment and rational and forward-looking wage-setters. If discretionary policies are followed, an economic cycle related to the political cycle results in equilibrium. This cycle is significantly different from the traditional “political business cycle.” Reputational mechanisms due to the repeated interaction of the two parties and the public or commitments to a common policy rule can improve upon the discretionary outcome by reducing or eliminating the magnitude of the economic fluctuations. * " This paper is based on one chapter of my Ph.D. dissertation at Harvard University [May 1986]. I am greatly indebted to Jeffrey Sachs for having directed my attention toward these issues and for many helpful conversations and suggestions. I also benefited from conversations with Andrew Abel, Dilip Abreu, Olivier Blanchard, Ramon Caminal, Andrew Caplin, Morris Fiorina, Benjamin Friedman, Herschel Grossman, Maria Herrero, Howard Rosenthal, and Susan Vitka. The comments of a referee greatly improved the paper. Ente “Luigi Einaudi” provided generous financial support. The views expressed in the paper are mine, as is the responsibility for any mistakes. This content is only available as a PDF. Copyright © 1987 by the President and Fellows of Harvard College http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Quarterly Journal of Economics Oxford University Press

Macroeconomic Policy in a Two-Party System as a Repeated Game

The Quarterly Journal of Economics , Volume 102 (3) – Aug 1, 1987

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References (33)

Publisher
Oxford University Press
Copyright
Copyright © 1987 by the President and Fellows of Harvard College
ISSN
0033-5533
eISSN
1531-4650
DOI
10.2307/1884222
Publisher site
See Article on Publisher Site

Abstract

Abstract This paper considers the interaction of two parties with different objectives concerning inflation and unemployment and rational and forward-looking wage-setters. If discretionary policies are followed, an economic cycle related to the political cycle results in equilibrium. This cycle is significantly different from the traditional “political business cycle.” Reputational mechanisms due to the repeated interaction of the two parties and the public or commitments to a common policy rule can improve upon the discretionary outcome by reducing or eliminating the magnitude of the economic fluctuations. * " This paper is based on one chapter of my Ph.D. dissertation at Harvard University [May 1986]. I am greatly indebted to Jeffrey Sachs for having directed my attention toward these issues and for many helpful conversations and suggestions. I also benefited from conversations with Andrew Abel, Dilip Abreu, Olivier Blanchard, Ramon Caminal, Andrew Caplin, Morris Fiorina, Benjamin Friedman, Herschel Grossman, Maria Herrero, Howard Rosenthal, and Susan Vitka. The comments of a referee greatly improved the paper. Ente “Luigi Einaudi” provided generous financial support. The views expressed in the paper are mine, as is the responsibility for any mistakes. This content is only available as a PDF. Copyright © 1987 by the President and Fellows of Harvard College

Journal

The Quarterly Journal of EconomicsOxford University Press

Published: Aug 1, 1987

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