Dynamic optimization of political popularity in an empirical macroeconomic model

We estimate a political popularity function for Israel, taking account of the effects of institutional and political changes on the structure of the function, and then use this function, in conjunction with a simple macroeconomic model of the Israeli economy, to calculate dynamic macroeconomic strategies which would have maximized the political popularity of three previous Israeli governments. We conclude that the dominant strategy was always to keep unemployment at the natural rate, but that this strategy was optimally combined with either rising inflation close to elections (for the earlier governments) or with near-zero inflation throughout the term (for later governments).We are indebted to Alex Cukierman, Moshe Mandelbaum, Jacob Rosenberg, Gordon Tullock, and Ben-Zion Zilberfarb for helpful comments, and to Shulamith Levy and the late Louis Guttman for the use of their popularity data. Research assistance was provided by T. Cagan, A. Friedman, J. Hertz, I. Landau, J. Mizrahi, and J. Sapir. This research was supported by grants from the Friedrich Flick Foundation, FRG, and the Economics Research Institute, Bar-Ilan University.