Modern Macroeconomics.pdf

544 Modern macroeconomicstude’ and seem to affect only certain policy instruments, particularly fiscalvariables (see Alesina, 1995). It is also well documented that during theReagan and Thatcher administrations the income distribution consequencesof the micro and macro policies were ‘particularly partisan’. Inequality increasedunder both administrations (see Alesina, 1989).10.10.2 Criticisms of the rational partisan theoryThere are a number of important weaknesses in the rational partisan theory.First of all, if the cyclical effects are due to the signing of wage contractsbefore an election, then one obvious solution is to delay the signing ofcontracts until the election result is known. This solution is, of course, not asapplicable where the timing of elections is fixed endogenously. However, inthe USA wage contracts are staggered and overlapping, which means that atleast a significant proportion of wage contracts will inevitably go over theelection date. A second important criticism is that, in line with other modelswhich assume nominal wage rigidity, the Alesina model implies a countercyclicalreal wage which is at odds with the stylized facts of the businesscycle. For theoretical purists a third criticism relates to the lack of firmmicroeconomic foundations in such models to explain the mechanism ofnominal wage contracting. Alesina (1995) describes this as the ‘Achilles heel’of the rational partisan theory. A fourth line of criticism originates from themost recent generation of equilibrium business cycle theories. According toreal business cycle theorists, monetary policy cannot be used to produce realeffects on output and employment, although they agree that monetary growthdetermines the rate of inflation. In real business cycle models aggregatefluctuations are determined mainly by shocks to the production function, andsuch shocks are endemic. The pre-electoral behaviour of politicians and postelectoralmonetary surprises are largely irrelevant. A benign monetary policywould not bring to an end aggregate fluctuations (see Chapter 6). A fifthcriticism relates to hysteresis effects. If the natural rate properties of rationalpartisan models do not hold due to persistence effects following an aggregatedemand disturbance, the political business cycle may be turned ‘upside down’(see Gartner, 1996). A sixth criticism relates to the empirical evidence. In anextensive survey Carmignani (2003) concludes that monetary policy is notthe source of political cycles in real variables (see also Drazen, 2000a, 2000b).Finally, some theorists argue that partisan and opportunistic models are notincompatible and a more complete model should incorporate both influences(see Frey and Schneider, 1978a, 1978b; Schultz, 1995). It is to this lattercriticism that we now turn.