Academic journal article American Economist

The New Political Macroeconomics: An Interview with Alberto Alesina

Academic journal article American Economist

The New Political Macroeconomics: An Interview with Alberto Alesina

Article excerpt

1. Introduction

The relationship between the economy and the political system has always attracted the interest of economists. During the past decade research into the various forms of interaction between politics and macroeconomics has become a major growth area giving rise to a field known as 'the new political macroeconomics,' a research area which has developed at the interface of macroeconomics, social choice theory and game theory. Of particular interest to macroeconomists is the influence that political factors have on such issues as business cycles, inflation, unemployment, growth, budget deficits and the conduct and implementation of stabilization policies.

A major contribution to this field of activity, both in terms of theoretical analysis and empirical investigation, has come from the research of Professor Alberto Alesina of Harvard University whose work on politico-economic cycles, the origin and implications of fiscal deficits, and the relationship between political stability and economic growth has been particularly influential (see Alesina, 1989; 1995; Alesina and Rosenthal, 1995; Alt and Alesina, 1996; Alesina and Roubini with Cohen, 1997). What progress has been made with regard to the development of the 'new political macroeconomics'? Through correspondence with Professor Alesina we sought answers to some important questions which have been the subject of investigation by researchers in this field. However, before presenting the text of our interview with Professor Alesina, conducted during March-April 1997, we first provide a brief survey of the development of politico-economic models in the area of aggregate instability, as well as more recent contributions relating to the origin and reduction of fiscal deficits and the political economy of growth.

2. Politico-economic models

Politico-economic models view government as an endogenous part of the political and economic system. This contrasts with the conventional approach to the analysis of policymaking traditionally adopted by economists following the contributions of Tinbergen (1952) and Theil (1956). For example, in the traditional optimizing approach pioneered by Theil the policymaker is modeled as a 'benevolent social planner' whose only concern is to maximize social welfare. Three crucial steps are envisaged. First, the policymaker specifies the goals of economic policy (for example, low inflation and unemployment). Second, given this social welfare function which the policymaker is attempting to maximize, a set of policy instruments (for example, fiscal and monetary policy) are chosen which will be used to achieve the desired objectives. Finally, the benevolent social planner must make use of an economic model so that the instruments can be set at their optimal values. This normative approach to the analysis of economic policy is therefore concerned with how policymakers should act and within the context of optimal control theory economists attempt to identify the optimal policy package in order to achieve the best outcome given the policymaker's preferences (see Chow, 1975). Thus the conventional normative approach to the analysis of economic policy treats the government as exogenous to the economy. Its only interest is in steering the economy towards the best possible outcome. Economic policy analysis is reduced to a technical exercise in maximisation subject to constraint.

In modeling politico-economic relationships the new political macroeconomics views the government as standing at the center of the interaction between political and economic forces. Once this endogenous view of government is adopted the welfare maximizing approach to economic policy formulation associated with the normative approach 'is no longer logically possible' (see Frey, 1984). Incumbent politicians are responsible for the choice and implementation of economic policy and their behavior will clearly be shaped by the various institutional constraints which make up the political system. …

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