Government Purchases Over the Business Cycle: The Role of Economic and Political Inequality

47 Pages Posted: 10 Aug 2010

See all articles by Ruediger Bachmann

Ruediger Bachmann

University of Michigan at Ann Arbor

Jinhui H. Bai

Georgetown University - Department of Economics

Date Written: August 2010

Abstract

This paper explores the implications of economic and political inequality for the business cycle comovement of government purchases. We set up and compute a heterogeneous-agent neoclassical growth model, where households value government purchases which are financed by income taxes. A key feature of the model is a wealth bias in the political aggregation process. When calibrated to U.S. wealth inequality and exposed to aggregate productivity shocks, such a model is able to generate milder procyclicality of government purchases than models with no political wealth bias. The degree of wealth bias that matches the observed mild procyclicality of government purchases in the data, is consistent with cross-sectional data on political participation.

Suggested Citation

Bachmann, Ruediger and Bai, Jinhui H., Government Purchases Over the Business Cycle: The Role of Economic and Political Inequality (August 2010). NBER Working Paper No. w16247. Available at SSRN: https://ssrn.com/abstract=1654234

Ruediger Bachmann (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Jinhui H. Bai

Georgetown University - Department of Economics ( email )

Washington, DC 20057-1036
United States
202-687-0935 (Phone)
202-687-6102 (Fax)

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