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New political macroeconomics:Critically evaluate the alternative approaches to the Political Business Cycle - Essay Example

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New political macroeconomics There are four main models to describe the political business cycle. Opportunistic and partisan models were the initial models while after their failure and with the emergence of rational expectation doctrine they developed being modified as rational opportunistic model and rational partisan model…
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New political macroeconomics:Critically evaluate the alternative approaches to the Political Business Cycle
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New political macroeconomics:Critically evaluate the alternative approaches to the Political Business Cycle

Download file to see previous pages... This model failed due to its own assumption of ideology where agents with differing ideology do not support political parties in elections. Opportunistic and Partisan model assumed the past performance of politicians affects the behaviour of agents while new doctrine of rational opportunistics suggested that economic agents are forward looking and expect progressive economic policies for future while rational partisan assumes that ideological differences of parties regarding macroeconomic policies creates uncertainties among agents so, analysing the outcome of elections and voter perspective for politicians can be difficult with this model. Taking account of pros and cons of all four models a new synthesis of opportunistic-partisan evolved which stated that parties before elections are opportunistic in designing macroeconomic policies while after winning elections they adapt their specific ideological policies into actions. Policy usually denotes to the guiding source of actions, these policy decisions are designed for achieve future targets or to achieve the targets of policies implemented earlier. For instance import policy, trade policy, property laws, stabilization of economic shock, regulations, resolving market failures, maintaining welfare policies, immigration policy and fiscal policy etc. Especially fiscal policies are designed to define the taxation and expenditure arrangements of the government and with these policies some objectives are attached such as to balance income distribution and economic stabilization etc. These economic policies and role of state are referred to as Political Economy which analyses the responsibilities of govt. through pillars of state. So to say in modern world of economics political decision have their influence in economic policy making. Keynes in contrast to classicals who believed that in long run self-correcting invisible forces maintain the market to equilibrium argued that in long run we “all are dead” and supported that government should intervene in economic decision for maintain demand in the economy which according to Keynes is the driving force of economy. These demand management policies imply that govt. should have the discretion to stabilize economy through expansionary fiscal policy, counter shocks, aggregate demand management, countercyclical fiscal policy, directed investment policies, export-led growth policies and through exchange rate policy during recession or depression. The prime concern of political economics is that politicians in power set electoral policies and in the process economic policies are also designed to support their electoral campaigns (Elias & Rodrigo, 2006). Such behaviour of politicians has been prescribed through two theories. First states that politicians are opportunistic and set policies for their re-election which is referred as business cycle theory (Nordhaus, 1975). Second theory states that they follow an ideology. First category politician design policies effect before elections while second category partisans effect policies after elections (Hibbs, 1977). These both theories imply that govt. / politics has the influence over economic decisions. During 1990s new theory evolved as of rational expectations by which politicians have less influence over macroeconomic policy decision ...Download file to see next pagesRead More
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