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10.5 Alternative Approaches to the ‘Political Business Cycle’: An Overview

In the theoretical literature on the political business cycle, which has developed

since the mid-1970s, we can distinguish four main approaches which

have evolved in two separate phases. The assumptions underlying these four

different approaches are summarized in Table 10.1 (see Alesina, 1988). During

the first phase, in the mid- to late 1970s, Nordhaus (1975) reawakened

interest in this area by developing an opportunistic model of the political

business cycle. This was followed by Hibbs (1977), who emphasized ideological

rather than office-motivated considerations. However, both the

Nordhaus and Hibbs models (the ‘old’ political macroeconomics) were swept

aside somewhat during the so-called rational expectations revolution which

Table 10.1 Politico-economic models of aggregate fluctuations

Assumptions about voters and economic agents

Assumptions Non-rational behaviour, Rational behaviour,

about politicians non-rational expectations rational expectations

Non-Partisan Nordhaus (1975) Rogoff and Sibert (1988)



Partisan Hibbs (1977) Alesina (1987)



Source: Alesina (1988).

dominated macroeconomic discussions during the mid- to late 1970s (see

Chapter 5). After a period of relative neglect a second phase of politicoeconomic

models emerged in the mid-1980s and research in this area has

continued to flourish ever since. Due to the influence of new classical theorists

these new models incorporate the assumption of rational economic

agents and voters. While economists such as Rogoff and Sibert (1988) developed

rational opportunistic models, Alesina (1987) produced a rational partisan

theory (the ‘new’ political macroeconomics).

In what follows we shall examine all four of these approaches (plus the

hybrid model of Frey and Schneider, 1978a, 1978b), each of which attempts

to endogenize the influence of political behaviour on the macroeconomy.