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The Political Polarization Index

24 Pages Posted: 22 Oct 2013  

Marina Azzimonti

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

Date Written: September 2013

Abstract

American politics have become increasingly polarized in recent decades. To the extent that political polarization introduces uncertainty about economic policy, this pattern may have adversely affected the economy. According to existing theories, a rise in the volatility of fiscal shocks faced by individuals should result in a decline in economic activity. Moreover, if polarization is high around election dates, businesses and households may be induced to delay decisions that involve high reversibility costs (such as investment or hiring under search costs). Testing these theories has been challenging given the low frequency at which existing polarization measures have been computed (in most studies, the series is available only biannually). In this paper, I provide a novel high-frequency measure of polarization, the political polarization index (PPI). The measure is constructed monthly for the period 1981-2013 using a search-based approach. I document that while the PPI fluctuates around a constant mean for most of the sample period prior to 2007, it has exhibited a steep increasing trend since the Great Recession. Evaluating the effects of this increase using a simple VAR, I find that an innovation to polarization significantly discourages investment, output, and employment. Moreover, these declines are persistent, which may help explain the slow recovery observed since the 2007 recession ended.

Keywords: polarization, political ideology, American politics, economic policy uncertainty, business cycles, electoral cycle

JEL Classification: E3, H3

Suggested Citation

Azzimonti, Marina, The Political Polarization Index (September 2013). FRB of Philadelphia Working Paper No. 13-41. Available at SSRN: https://ssrn.com/abstract=2343139 or http://dx.doi.org/10.2139/ssrn.2343139

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

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