CAREER: Political Economy and Policy with Imperfect Information

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This research has three projects. The first studies a novel model of political economy for a small open economy. The model incorporates a main political friction (disagreement about the timing of expenditures) together with lack of commitment to tax policy or debt repayment. It is a parsimonious modification to the standard small open economy model and delivers rich dynamics driven mainly by the political economy friction. The model is thus capable of generating new and interesting predictions regarding the behavior of debt, growth and political institutions. Several important theoretical extensions and an analysis of the role of policies such as debt relief and aid are planned for future work. The second project relates to the design of optimal policy under private information. This project will extend previous economic techniques to be able to solve policy design questions when the policy maker has biased preferences but posses valuable private information. I will analyze two particular cases: (i) the optimality of budget-balance rules for fiscal authorities, and (ii) the optimality of tariff caps in trade agreements. Finally, the third project will use a recently developed macroeconomic model of information and monetary policy, to study the question of optimal public communication by a Central Bank. Broader Impact: The research project contributes to the economic growth literature by introducing political economy considerations into the basic toolkit of macroeconomists. It also deals with more specific policy questions that have been at the top of the agenda of several international organizations. For example, there is a large discussion regarding the role of debt relief to emerging markets, as well as an ongoing debate on the benefits (if any) of foreign aid to poor nations. The research will provide a modern framework to analyze the role of such policies. The project on balanced budget rules has important implications for policy, not only for emerging markets but also in the developed world. The project on optimal tariff rules has implications for how negotiations in GATT/WTO can be improved to benefit all parties involved. Finally, the project on communication is motivated by practical issues faced by the Federal Reserve and other Central Banks.