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| Endogenous
economic policy or political macroeconomics |
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Political macroeconomics or, as it is also called, endogenous economic policy refers to the study of what makes policy makers tick, including governments and central banks.
 
Why do policy makers pick those policies they conduct?
Why do they sometimes appear to create recessions and booms rather than smooth them out?
Why does it at times appear so hard to deliver price stability?
What rules or targets should monetary policy adopt in a world subject to periodic shocks to the economy?
This section presents two elearning
applets designed to explore the above issues.
The first one is on the political
business cycle.
The second one is designed to look into monetary policy rules and inflation targets.
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This applet
explores the possibility that selfish, utility-maximizing governments,
with a strong motive to get reelected, may deliberately trigger
appropriately timed downswings and upswings of the economy.
Such election-geared booms and recessions, engineered for political
reasons by the government itself, are called political business
cycles.
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This applet
features an economy with rational expectations
and a central bank with some independence from
the government. It asks how such a central bank responds to
supply shocks. It derives the reaction
curve on an intuitive basis and motivates why democracies
may suffer from an inflation bias. Finally,
it looks at which rules or targets should be
assigned to the central bank in order to stabilize income
and inflation in a way that accommodates the preferences
of society.
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