The Political Economy of Conquering Inflation: The Impact of Elite Opposition and Elite Consensus on Inflation-Stabilization Open Access
Baerg, Nicole Rae (2013)
Abstract
Why do political elites make public proclamations about the future? What influence, if at all, do elites' statements have on the behavior of their audience? I argue that political elites' public statements can be critical in signaling information about the economy. I examine the effect of political opposition on the content and clarity of elites' proclamations in the news. I also examine political elites' cues on households' inflation expectations and inflation outcomes. The theory offers a political economy model of elite and household information transmission where inflation expectations are endogenously determined. Unlike previous, single-sender models, I present a model where strategically minded political elites can offer counter claims to another elite's pronouncements. I find that the ability for one elite to confirm or refute another elite's message influences how precisely elites can transmit information to households. The testable hypotheses that I consider are that political opposition is associated with greater information precision and that greater information precision attenuates inflation expectations, leading to lower inflation. I then test these hypotheses using individual and country level data of 6 Latin American countries, between 1990-2010. Results provide some support for my hypotheses, however, significant across country variation in the estimates generates many interesting new questions.
Table of Contents
1 Why Communication Influences Inflation 11
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 11
1.2 A New Model of Inflation . . . . . . . . . . . . . . . . . . .
. . . . . . . . 15
1.3 Political Determinants of Communication . . . . . . . . . . . .
. . . . . . 17
1.4 Plan of the Dissertation . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 21
2 Political Communication and Inflation Expectations 22
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 22
2.1.1 Inflation and its Consequences . . . . . . . . . . . . . . .
. . . . . 24
2.2 Literature Review . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 37
2.2.1 Bargaining . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 38
2.2.2 Credible Commitment . . . . . . . . . . . . . . . . . . . . .
. . . 42
2.2.3 Political Business Cycles . . . . . . . . . . . . . . . . . .
. . . . . 47
2.3 Information and Uncertainty . . . . . . . . . . . . . . . . . .
. . . . . . . 49
2.3.1 Multiple Senders . . . . . . . . . . . . . . . . . . . . . .
. . . . . 54
2.3.2 Endogenous Inflation Expectations . . . . . . . . . . . . . .
. . . . 55
2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 61
3 A Theory of Information Transmission 64
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 64
3.1.1 When Talk is Cheap . . . . . . . . . . . . . . . . . . . . .
. . . . 66
3.1.2 Assumptions . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 70
3.1.3 Model Actors . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 76
3.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 79
3.2.1 Game Sequence . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 81
3.2.2 Utility functions . . . . . . . . . . . . . . . . . . . . . .
. . . . . 82
3.2.3 Equilibrium Definitions and Further Notation . . . . . . . .
. . . . 85
3.2.4 Political Consensus . . . . . . . . . . . . . . . . . . . . .
. . . . . 86
3.2.5 Special Case of Multiple Sender Model: Single Sender Game . .
. 92
3.2.6 Political Opposition . . . . . . . . . . . . . . . . . . . .
. . . . . 94
3.3 Model Results . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 98
3.4 Heterogeneous Households . . . . . . . . . . . . . . . . . . .
. . . . . . . 101
3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 102
4 Testing the Argument: Political Opposition 104
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 104
4.2 Theoretical Model Recap . . . . . . . . . . . . . . . . . . . .
. . . . . . . 107
4.3 The Empirical Model . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 112
4.3.1 Estimation Model . . . . . . . . . . . . . . . . . . . . . .
. . . . . 112
4.4 Data and Variables . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 113
4.4.1 Dependent Variable: Information Precision . . . . . . . . . .
. . . 113
4.4.2 Main Independent Variable: Elite Opposition . . . . . . . . .
. . . 121
4.5 Empirical Analysis . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 128
4.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 133
5 Testing the Argument: Economic Performance 135
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 135
5.2 Information, Inflation Expectations, and Inflation . . . . . .
. . . . . . . . 136
5.3 The Empirical Model . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 137
5.3.1 Estimation Model . . . . . . . . . . . . . . . . . . . . . .
. . . . . 139
5.3.2 Priors . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 140
5.4 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 141
5.4.1 Dependent Variable: Inflation . . . . . . . . . . . . . . . .
. . . . 142
5.4.2 Independent Variable: Inflation Expectations . . . . . . . .
. . . . 145
5.4.3 Independent Variable: Information Precision . . . . . . . . .
. . . 147
5.5 Classical Analysis . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 148
5.6 Bayesian Multilevel Modeling . . . . . . . . . . . . . . . . .
. . . . . . . 150
5.7 Opposition, Communication, and Economic Performance . . . . . .
. . .154
5.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 156
6 Conclusion 157
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 157
6.2 Implications . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 160
6.3 Suggestions for future research . . . . . . . . . . . . . . . .
. . . . . . . . 162
Appendix 163
A.1 Proposition and Proofs for Political Consensus . . . . . . . .
. . . . . . . . 163
A.2 Propositions and Proofs for Political Opposition . . . . . . .
. . . . . . . . 163
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