POLITICAL ECONOMY IN MACROECONOMICS DRAZEN A. Bankowa.pl

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.

Reviews:

"Very well written and concise. . . Highly recommend[ed] . . . to any student interested in political economy."--Gilles Saint-Paul, Journal of Economic Literature

"[A] magnificent new book. . . . Drazen's book has established the benchmark for years to come, in terms of both coverage and depth of critical assessment. . . . This is a book you will want on your shelf."--Leonardo Bartolini, Journal of International Economics

Endorsements:

"Formal models of political economy are today part of the tool kit of every well-trained macroeconomist. There exists no better guide to these models than this colossal book. Allan Drazen is not only a leading practitioner of the art; he is a first-rate expositor. A survey, textbook, and critique all in one, this book informs, teaches, and stimulates. You will not need another book on political economy for some time to come."--Dani Rodrik, Harvard University

"This book is magnificent, and is sure to become a standard reference in the rapidly growing field of politics and macroeconomics."--Kenneth Rogoff, Harvard University

"Drazen's book gives an excellent account of the political dimension of macroeconomic policy. With its careful attention to methodological issues, thorough and balanced presentation of the literature, and clear exposition and perceptive evaluation of models, this book will be valuable both as a reference volume for researchers and a textbook for graduate students."--Avinash Dixit, Princeton University

TABLE OF CONTENTS:

Preface xi
Introductory Note xiii

PART I: BASIC ISSUES AND TOOLS OF ANALYSIS 1

CHAPTER ONE What is a Political Economy? 3
1.1 Introduction 3
1.2 Politics and Economics 5
1.3 Types of Heterogeneity 9
1.4 An Illustration of Approaches 12
1.5 Plan of the Book 18

CHAPTER TWO Economic Models for Political Analysis 20
2.1 Introduction 20
2.2 The Principal-Agent Problem 22
2.3 Discrete Time Dynamic Models*b2Dynamic Programming 31
2.4 The Overlapping Generations Model 35
2.5 Effects of Uncertain Future Policies 38
2.6 Conclusions 58

CHAPTER THREE Decisionmaking Mechanisms 60
3.1 Introduction 60
3.2 How Much Political Detail? 61
3.3 Choosing Decisionmaking Mechanisms 64
3.4 Direct Democracy 70
3.5 Representative Democracy 77
3.6 Multiparty Systems 85
3.7 Interest Groups and Lobbying 90
3.8 Transaction Cost Politics 96
3.9 Conclusions 98

PART II: COMMITMENT, CREDIBILITY, AND REPUTATION 99

CHAPTER FOUR The Time-Consistency Problem 101
4.1 Introduction 101
4.2 Capital Taxation 104
4.3 Time Inconsistency as a Conflict of Interests 110
4.4 The Barro-Gordon Model 113
4.5 Seigniorage Revenue and the Optimum Quantity of Money 121
4.6 Commitment versus Flexibility 126
4.7 Conclusions 130

CHAPTER FIVE Laws, Institutions, and Delegated Authority 131
5.1 Introduction 131
5.2 Laws, Constitutions, and Social Contracts 132
5.3 Delegation of Authority 140
5.4 Central Bank Independence 142
5.5 Fiscal Structures for Time Consistency 157
5.6 Conclusions 164

CHAPTER SIX Credibility and Reputation 166
6.1 Introduction 166
6.2 Reputation 168
6.3 "Reputation" under Complete Information 169
6.4 Reputation under Incomplete Information--Mimicking 175
6.5 Does Reputation "Solve" the Time-Consistency Problem?--Three Caveats 183
6.6 Signaling 187
6.7 Reputation for Not Reneging on Commitments 195
6.8 Credibility and External Circumstances 201
6.9 Ambiguity, Secrecy, and Imprecise Control 208
6.10 Conclusions 214

PART III: HETEROGENEITY AND CONFLICTING INTERESTS 217

CHAPTER SEVEN Elections and Changes of Policymakers 219
7.1 Introduction 219
7.2 Elections and Policymaker Performance 223
7.3 The Opportunistic Political Business Cycle 228
7.4 Partisan Political Cycles 246
7.5 Competence and Prospective Voting 268
7.6 Campaign Promises 278
7.7 Interactions of the Executive and the Legislature 283
7.8 Multiparty Systems and Endogenous Election Dates 293
7.9 Tying the Hands of One's Replacement 300
7.10 Conclusions 308

CHAPTER EIGHT Redistribution 309
8.1 Introduction 309
8.2 Redistribution of Income 311
8.3 Differential Transfers 318
8.4 Nonmonetary Redistribution 324
8.5 Rent Seeking and Predation 334
8.6 Intergenerational Redistribution 345
8.7 Redistribution and Mobility 354
8.8 Conclusions 370

CHAPTER NINE Public Goods 372
9.1 Introduction 372
9.2 Public Goods--The Neoclassical Approach 375
9.3 Provision of Public Goods in Practice 379
9.4 Voluntary Provision of Public Goods--Free Riders and Collective Action 382
9.5 Voluntary Provision of Public Goods--Clubs 391
9.6 The Static Public Goods Game 395
9.7 The War of Attrition in Public Goods Provision 397
9.8 Conclusions 401

CHAPTER TEN Inaction, Delay, and Crisis 403
10.1 Introduction 403
10.2 Economic Arguments 407
10.3 Vested Interests 411
10.4 Nonadoption Due to Uncertainty about Individual Benefits 414
10.5 "Communication" Failures 423
10.6 Conflict over the Burden of Reform 432
10.7 Common Property Models 439
10.8 Economic Crises 444
10.9 Conclusions 454

PART IV: APPLICATION TO POLICY ISSUES 455

CHAPTER ELEVEN Factor Accumulation and Growth 457
11.1 Introduction 457
11.2 Basic Models of Fiscal Policy and Capital Accumulation 461
11.3 Imperfect Capital Markets, Externalities, and Endogenous Income Distribution 474
11.4 Political Institutions and Regimes 488
11.5 Socio-Political Instability 500
11.6 Empirical Determinants of Growth 513
11.7 Conclusions 524

CHAPTER TWELVE The International Economy 526
12.1 Introduction 526

PART I Exchange-Rate Arrangements 529
12.2 Fixed versus Flexible Exchange Rates 529
12.3 Currency Crises and Contagious Speculative Attacks 536
12.4 Monetary Unions 544

PART II Macroeconomic Interdependence 559
12.5 International Policy Cooperation 559
12.6 Political Responses to External Shocks 579

PART III International Capital and Aid Flows 580
12.7 Capital Controls 580
12.8 Sovereign Borrowing 587
12.9 Foreign Aid 601
12.10 Conclusions 613

CHAPTER THIRTEEN Economic Reform and Transition 615
13.1 Introduction 615
13.2 Defining the Issues 617
13.3 Economic and Political Constraints 621
13.4 The Implications of Magnitude--A Formal Analysis 626
13.5 Heterogeneity and Political Constraints 632
13.6 Labor Reallocation 643
13.7 Privatization 653
13.8 Price Liberalization 663
13.9 Conclusions 674

CHAPTER FOURTEEN The Size of Government and the Number of Nations 675 14.1 Introduction 675
14.2 The Scope of Government 677
14.3 The Size of Government--Government Spending 679
14.4 Government Debt and Deficits 690
14.5 Budgetary Rules and Institutions 697
14.6 The Number of Nations 707
14.7 Conclusions 731

Bibliography 735
AUTHOR INDEX 765
SUBJECT INDEX 771

792 pages Paperback

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