ABSTRACT
This section starts the second part of our monograph and our discussion of fiscal policy. Our general approach in this Part borrows from the methods of public finance. Namely, the models we study have explicit microeconomic foundations and lend themselves to meaningful welfare analysis. But our approach departs from the traditional public finance approach in that it includes a richer description of the policy environment. Traditional public finance is largely normative and, to the extent it deals with dynamic models, typically assumes that the policymaker can commit future policy. Weare after a positive as well as a normative theory, and typically assume that policy can not be committed in advance. This leads to credibility constraints on the policymaker, similar to those that we studied in the first Part. Furthermore, we discuss policy environments where political considerations help shape policy and where the expected policies of future governments with different preferences impose additional, political, incentive constraints on current policymakers.
