Abstract:
Strategic interaction between the government and economic agents can lead to the creation of more populism than is socially optimal. The tradeoffs through which this occurs, important for a populous democracy with a large number of poor, is that between populism and growth. This has not received much analytical attention. We model this tradeoff and show that (i) a Nash equilibrium will occur with a level of populism higher than the optimal, (ii) define a sustainable rate of growth, (iii) specify the conditions on which the results depend, (iv) discuss stabilisation possibilities, and (v) show that optimal delegation is to a pro-growth monetary authority and a conservative fiscal authority. This would lower populism and in inflation while keeping growth at sustainable levels. Last, the model is used to interpret Indian macroeconomic performance.
