Political Distribution Risk and Aggregate Fluctuations

110 Pages Posted: 28 Jul 2017

See all articles by Thorsten Drautzburg

Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Pablo Guerrón-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 4 versions of this paper

Date Written: July 25, 2017

Abstract

We argue that political distribution risk is an important driver of aggregate fluctuations. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output and asset prices. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output, unemployment, and sectoral asset prices. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back up the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 34% of aggregate fluctuations.

Keywords: Political redistribution risk, bargaining shocks, aggregate fluctuations, partial fil-ter, historical narrative

JEL Classification: E32, E37, E44, J20

Suggested Citation

Drautzburg, Thorsten and Fernández-Villaverde, Jesús and Guerron-Quintana, Pablo, Political Distribution Risk and Aggregate Fluctuations (July 25, 2017). PIER Working Paper No. 17-016. Available at SSRN: https://ssrn.com/abstract=3009297 or http://dx.doi.org/10.2139/ssrn.3009297

Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Philadelphia, PA 19104
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Pablo Guerron-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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