Political Distribution Risk and Aggregate Fluctuations
110 Pages Posted: 28 Jul 2017
Date Written: July 25, 2017
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: Suggested Citation