Polarized Business Cycles

44 Pages Posted: 23 Nov 2013

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: November 1, 2013

Abstract

We are motivated by four stylized facts computed for emerging and developed economies: (i) business cycle movements are wider in emerging countries; (ii) economies in emerging countries experience greater economic policy uncertainty; (iii) emerging economies are more polarized and less politically stable; and (iv) economic policy uncertainty is positively related to political polarization. We show that a standard real business cycle (RBC) model augmented to incorporate political polarization, a 'polarized business cycle' (PBC) model, is consistent with these facts. Our main hypothesis is that fluctuations in economic variables are not only caused by innovations to productivity, as traditionally assumed in macroeconomic models, but also by shifts in political ideology. Switches between left-wing and right-wing governments generate uncertainty about the returns to private investment, and this affects real economic outcomes. Since emerging economies are more polarized than developed ones, the effects of political turnover are more pronounced. This translates into higher economic policy uncertainty and amplifies business cycles. We derive our results analytically by fully characterizing the long-run distribution of economic and fiscal variables. We then analyze the effect of a permanent increase in polarization on PBCs.

Keywords: Polarized Business Cycle, Real Business Cycle, Economic Policy Uncertainty

JEL Classification: E3, H3

Suggested Citation

Azzimonti, Marina and Talbert, Matthew, Polarized Business Cycles (November 1, 2013). FRB of Philadelphia Working Paper No. 13-44, Available at SSRN: https://ssrn.com/abstract=2355189 or http://dx.doi.org/10.2139/ssrn.2355189

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

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