Partisan Cycles and the Consumption Volatility Puzzle

34 Pages Posted: 21 Jun 2011 Last revised: 25 Jun 2011

See all articles by Marina Azzimonti

Marina Azzimonti

SUNY Stony Brook - Department of Economics; National Bureau of Economic Research (NBER)

Matthew Talbert

University of Texas at Austin

Date Written: June 1, 2011

Abstract

Standard real business cycle theory predicts that consumption should be smoother than output, as observed in developed countries. In emerging economies, however, consumption is more volatile than income. In this paper the authors provide a novel explanation of this phenomenon, the ‘consumption volatility puzzle,’ based on political frictions. They develop a dynamic stochastic political economy model where parties that disagree on the size of government (right-wing and left-wing) alternate in power and face aggregate uncertainty. While productivity shocks affect only consumption through responses to output, political shocks (switches in political ideology) change the composition between private and public consumption for a given output size via changes in the level of taxes. Since emerging economies are characterized by less stable governments and more polarized societies, the effects of political shocks are more pronounced. For a reasonable set of parameters the authors confirm the empirical relationship between political polarization and the ratio of consumption volatility to output volatility across countries.

Keywords: Consumption Volatility Puzzle, Emerging Markets, Public Spending, Markov Equilibrium, Political Cycles, Time Consistency

Suggested Citation

Azzimonti, Marina and Talbert, Matthew, Partisan Cycles and the Consumption Volatility Puzzle (June 1, 2011). FRB of Philadelphia Working Paper No. 11-21, Available at SSRN: https://ssrn.com/abstract=1866431 or http://dx.doi.org/10.2139/ssrn.1866431

Marina Azzimonti (Contact Author)

SUNY Stony Brook - Department of Economics ( email )

NY 11733-4384
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Matthew Talbert

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
37
Abstract Views
436
PlumX Metrics