Central Bank Independence in Transition Economies

1.2.2. Political Monetary Cycles 

The basic model of policy game can be given more political flavour by 

combining it with the hypothesis of political monetary cycle. In traditional business 

cycle models (Nordhaus 1975) policymakers, to be re-elected, use monetary expansion 

to stimulate output before the election. The main assumptions of this model are voters' 

“naivness” (voters are not rational in forming their expectations) and politicians' 

opportunism (their main or the only goal is re-election). In new monetary cycles 

models based on the game theory politicians are ideologically motivated and voters are 

rational. Alesina and Sachs (1988) propose a policy game model with two political 

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