Macroeconomics and Politics

The recent game-theoretic macroeconomic literature provides a useful tool for analyzing the relationship between political institutions and the macroeconomy. In particular, this paper examines two related issues: the effects of electoral competition on macroeconomic policy and on the economic cycle, and the role of different degrees of independence of the Central Bank as a determinant of monetary policy. The game-theoretic literature in this area has generated several results that are consistent with the empirical evidence. This claim is supported by reviewing the available empirical results and by performing several new tests. In particular, this paper emphasizes the different empirical implications of rational and optimizing politico-economic models in respect to non-rational approaches. Several open issues and new directions of research are also explored in the conclusions.