On the theory of optimal government behaviour

A small politico-economic model of the U.S. is presented. Optimal policies for a vote-maximising government and an ideology-maximising government are derived. Different assumptions concerning the expectation formation mechanism and the discount rates of voters and government are employed. Though the structure of the cycle depends on the specific assumptions, it turns out that in most cases it is advantageous for the government to produce a ‘political business cycle’. Therefore it is asked how voters can force government to choose the socially optimal policy.