Policy-Making: Disentangling Politics from Economics
Abstract: This paper models policy-making as an intricate process in which governments balance political and economic considerations. I incorporate this view into a macro model with heterogeneous agents who face idiosyncratic shocks and express their political sentiments. I provide analytical results when political sentiments are uniformly distributed and independent over time. The model endogenously sorts people into three categories depending on their policy demands: the “indifferent”, “the sensible”, and “the senseless” citizens. Policy-making responds mainly to the dynamics of sensible agents, but the survival of the government can be threatened by senseless agents. I expand the model to consider a general distribution of sentiments that depends on past sentiments so that the government takes into account the future threats of its current policy decisions. The model allows for a structural empirical approach to disentangle how economic versus political grounds have influenced policy decisions and the process of development across countries.
Diego Huerta
PhD Student in Economics
I’m a fifth-year economics Ph.D. candidate at Northwestern University. I’m a macroeconomist with an interest in political economy. I work with heterogeneous agent models to understand the joint determination of inequality, policies, and macroeconomic outcomes. My JMP proposes a theory that explains the striking differences in the evolution of the welfare state across countries. In addition to my JMP, my research explores the economic origins of financial and labor regulations across countries. I will be on the 2023/2024 Job Market.