The political theory of the business cycle

Abstract

Two strands of recent empirical work pose a challenge for the macro theorist when brought together. One is the rational expectations interpretation of the business cycle, the other is the political theory of the business cycle. This paper attempts a reconciliation of these two strands in a theory where national political parties have to satisfy the preference of their own supporters as well as the floating voter. The implications are that Party voters evaluate government performance with respect to expected inflation and output and their variances and that parties will pursue different feedback rules.