The broad impact of the proposal is to inform public policy, both in the U.S. and in other countries. How to set the fiscal policy over the business cycle is arguably one of the most important questions in macroeconomics. Absent in most discussions is a clear understanding of the time inconsistency problems involved. This situation is unfortunate. For example work on how monetary policy is conducted in environments without commitment has had a tremendous impact on the Federal Reserve System or on the design of new institutions as the European Central Bank and it has been regarded as a significant factor behind the apparent higher quality of monetary policy over the last two decades. If similar questions could be incorporated in the discussion of fiscal policy important welfare improvements could be obtained.
To achieve this goal, the proposal mixes standard macroeconomic tools, game theory and recent advances in computational science. It improves our understanding of the dynamics of how society reacts to changing government policies, helps the government to anticipate the consequences of its decisions and integrates formal modeling with empirical data in a transparent and clear way. Also the project, through its methodological contributions, improves the tools to analyze complex interactions, with application along all the human behavior sciences, including not only economics but also political science, sociology and others where the problems of lack of commitment and repeated interaction are pervasive. Finally, because of its use of mathematics and computer science tools, the current research strengthens the links between the political and economic context of human behavior with other academic communities in mathematics and information technologies.
