A Computable Equilibrium Model for the Study of Political Economy

Despite much hard work in recent years, economics and political science remain largely separate disciplines. Few meaningful bridges have been build between them, and hence useful gains from intellectual trade between the two have not been realized. Some of the most recent efforts to construct such a bridge are critically evaluated. It is shown that this literature suffers from a lack of theoretical balance between economic and political theory; unrealistic, temporally aggregated conceptions of political-economic equilibrium; failure to incorporate theoretically meaningful stochastic elements of economic and political processes; and the absence of a coherent methodology for gauging the empirical power of political-economic models. In the spirit of the AJPS workshop, it is shown how these problems can be solved. An improved model is built, one which fuses a branch of real business cycle theory and the theory of Presidential approval. This model produces a notion of computable political-economic equilibrium which provides for market clearing, and simultaneous stochastic optimization by economic and political agents. Then, using data analysis techniques developed in parallel by real business cycle theorists (Lucas, 1981, Prescott, 1986, 1991, Kyland and Prescott 1990, 1991) and political methodologists (Brady, forthcoming; Jackson, 1995)) the model is calibrated for the U.S. It is demonstrated that the calibrated model mimics the data for the U.S., that is, when simulated, the model produces time series which when appropriately detrended have properties which are very similar to those of detrended actual data for the sample period. Finally, the model is used to study some important counterfactuals. One of these is the impact of the increase in approval volatility that the new world order is likely to spawn; the other is an assessment of the impact of Presidents pursuing relatively high--nonminimum winning--levels of approval. In these ways, a better bridge is constructed between the two disciplines and valuable insights are gained into the interplay of democracy and markets.