Revealed Preferences for Macroeconomic
Stabilization
In
the new Keynesian model of endogenous stabilization governments have objectives
with respect to macroeconomic performance, but are constrained by an augmented
Phillips curve. Because they react more quickly to inflation shocks than
private agents, governments can lean against the macroeconomic wind. We develop
an econometric test of this characterization of the political-economic
equilibrium. Applying this methodology to a variety of quadratic social welfare
functions provides inferences about the functional form of stabilization
preferences and about the formation of expectations.