An Analysis Of Political Business Cycle Theory and its Relationship with the New Political Macroeconomics

The paper analyses the four principal model types that comprise the political business cycle literature. It then considers how this literature complements the ‘new political macroeconomics’ in analysing the impact of politics on inflation. Political business cycle models can be classified according to the political motivations of opportunism and ideology as well as by the way in which individuals form expectations. Using this classifications we pay particular attention to the underlying assumptions of the models. The paper concludes that a satisfactory model should incorporate the possibility of both ideological and opportunistic behaviour. While some academics continue to frown at the political business cycle literature, the ‘new political macroeconomics’ has generally been well received, perhaps as a consequence of its foundations stemming from the new classical macroeconomic revolution of the 1970s. However, the two have common political foundations in exploring the effect of political incentives on macroeconomic variables. The incorporation of rational expectations by political business cycle theorists has united the two strands of literature to some extent and yet, as we explain, there remain factors that one can take from the political business cycle literature and incorporate within the new political macroeconomics.Political business cycles; objective functions; opportunism; ideology; inflation bias

Investing under model uncertainty: decision based evaluation of exchange rate forecasts in the US, UK and Japan

We evaluate the forecast performance of a range of theory-based and atheoretical models explaining exchange rates in the US, UK and Japan. A decision-making environment is fully described for an investor who optimally allocates portfolio shares to domestic and foreign assets. Methods necessary to compute and use forecasts in this context are proposed, including the means of combining density forecasts to deal with model uncertainty. An out-of-sample forecast evaluation exercise is described using both statistical criteria and decision-based criteria. The theory-based models are found to perform relatively well when their forecasts are judged by their economic value

Speculation in Standard Auctions with Resale

In standard auctions with symmetric, independent private value bidders resale creates a role for a speculator—a bidder who is commonly known to have no use value for the good on sale. For second-price and English auctions the efficient value-bidding equilibrium coexists with a continuum of inefficient equilibria in which the speculator wins the auction and makes positive profits. First-price and Dutch auctions have an essentially unique equilibrium, and whether or not the speculator wins the auction and distorts the final allocation depends on the number of bidders, the value distribution, and the discount factor. Speculators do not make profits in first-price or Dutch auctions