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Drazen: Political economy in macroeconomics

Disclaimer. Don't rely on these old notes in lieu of reading the literature, but they can jog your memory. As a grad student long ago, my peers and I collaborated to write and exchange summaries of political science research. I posted them to a wiki-style website. "Wikisum" is now dead but archived here. I cannot vouch for these notes' accuracy, nor can I even say who wrote them. If you have more recent summaries to add to this collection, send them my way I guess. Sorry for the ads; they cover the costs of keeping this online.

Drazen. 2000. Political economy in macroeconomics. Princeton: Princeton University Press.

CHAPTER 4: THE PROBLEM

THE PUZZLE OF TIME INCONSISTENCY

AN EXPLANATION:

Time inconsistency problems (Y) arise when there is sequential decisionmaking (X1) and conflicting interests (X2).

COMMITMENT VS FLEXIBILITY

Since we can't specify all possible future states of the world ex ante, it isn't necessarily good to bind your central bank too tightly. There are two issues here: how much commitment is desireable, and how to get it. Drazen considers only the second. Possible ways of binding the central bank while maintaining some flexibility:

CHAPTER 5: SOME POLICY SOLUTIONS TO THE PROBLEM

How can we make the state goals at time t credible for time t+1? What would be more credible than simply publicizing an intention/goal not to raise inflation?


CHAPTER 6: SOME REPUTATIONAL SOLUTIONS TO THE PROBLEM

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Tags

Drazen, Allan (author)Political ScienceEconomicsCredible CommitmentCentral BanksEconomic Policy

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