Post-election it is discovered that the previous level of government spending is too high, and a period of austerity begins represented as a shift from 2 to 3 (Figure 1). A decrease in government spending occurs, shifting from SPRC1 to SPRC2 where inflation expectations are based upon previous, leading to a withdrawal of confidence in the market. When government spending drops, aggregate supply contracts (AS to AS’) leading to output returning to a lower level, meaning firms then stop investing in production make cuts, meaning that unemployment rises again, and this continues until the economy ends up at point 4- where inflation is zero and unemployment is higher than prior to the election. Therefore, due to a decrease in government spending
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And that the government opt to spend in the right areas that can encourage output growth- such as in technology or maybe tax subsidies on investments. Additionally, research conducted on African countries by Steve Block (2002) suggested that a pre-election boom occurs followed by a post-election recession, when the incumbent government retains its position.
Modifications of Monetary Policy:
The ROPBC implies that the incumbent keeps an ambiguous level of control over monetary policy, so that when required (under political opportunism) the policy maker can generate positive shocks in the economy at times that they are more concerned than they typically are about economic stimulation (prior to the election).
The implications of this are that, under “tight control”- (Cuikerman and Meltzer, (1986), p. ), the policymaker controls monetary policy very closely- there will be a few periods in which a downturn occurs. As a result, inflation expectations fall quickly and unexpected rates of money growth remain negative for a relatively brief period and the accompanying unemployment is relatively …show more content…
In addition to incumbent’s using their political power to “ensure that policy-makers central bank appointees share their electoral and party-political goals” (Lohnmann, 1998). The information asymmetry present here, is that the government know the current preference of the procedure but the public do not- the public become aware of changes in increments by ‘observing monetary growth’ (Cuikerman and Meltzer, 1986).
Following the Lohmann (1998) assumption that monetary policy maker maximizes their own (politically motivated) objective function that is positively related to economic stimulation through monetary surprises, and negatively related to money growth. Implying that an increase in money supply may hamper money growth, and thereby lower inflation (which is what the voters want).
And that the government opt to spend in the right areas that can encourage output growth- such as in technology or maybe tax subsidies on investments. Additionally, research conducted on African countries by Steve Block (2002) suggested that a pre-election boom occurs followed by a post-election recession, when the incumbent government retains its position.
Modifications of Monetary Policy:
The ROPBC implies that the incumbent keeps an ambiguous level of control over monetary policy, so that when required (under political opportunism) the policy maker can generate positive shocks in the economy at times that they are more concerned than they typically are about economic stimulation (prior to the election).
The implications of this are that, under “tight control”- (Cuikerman and Meltzer, (1986), p. ), the policymaker controls monetary policy very closely- there will be a few periods in which a downturn occurs. As a result, inflation expectations fall quickly and unexpected rates of money growth remain negative for a relatively brief period and the accompanying unemployment is relatively …show more content…
In addition to incumbent’s using their political power to “ensure that policy-makers central bank appointees share their electoral and party-political goals” (Lohnmann, 1998). The information asymmetry present here, is that the government know the current preference of the procedure but the public do not- the public become aware of changes in increments by ‘observing monetary growth’ (Cuikerman and Meltzer, 1986).
Following the Lohmann (1998) assumption that monetary policy maker maximizes their own (politically motivated) objective function that is positively related to economic stimulation through monetary surprises, and negatively related to money growth. Implying that an increase in money supply may hamper money growth, and thereby lower inflation (which is what the voters want).