New Political Macroeconomics - Essay Example

This model failed due to its own assumption of ideology where agents with differing ideologies do not support political parties in elections. The opportunistic and Partisan model assumed the past performance of politicians affects the behaviour of agents while the new doctrine of rational opportunistic suggested that economic agents are forward-looking and expect progressive economic policies for the future while rational partisan assumes that ideological differences of parties regarding macroeconomic policies create uncertainties among agents so, analyzing the outcome of elections and voter perspective for politicians can be difficult with this model.

Taking account of the 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. 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 the role of the state are referred to as Political Economy which analyses the responsibilities of govt. through pillars of the state. So to say in the modern world of economics political decisions have their influence on economic policymaking. Keynes in contrast to classical who believed that in the 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 decisions for maintaining demand in the economy which according to Keynes is the driving force of the economy.

These demand management policies imply that govt. should have the discretion to stabilize the 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 behavior of politicians has been prescribed through two theories. First states that politicians are opportunistic and set policies for their re-election which is referred to as business cycle theory (Nordhaus, 1975). The second theory states that they follow an ideology. First category politicians design policies effect before elections while second category partisans affect policies after elections (Hibbs, 1977). Both theories imply that govt. / politics has an influence on economic decisions.

During the 1990s new theory evolved as rational expectations by which politicians have less influence over a macroeconomic policy decision as voters choose rationally according to his/her expectations which resulted in the development of a politico-economic circular flow model (Alesina, et al., 1997).