Political Distribution Risk and Aggregate Fluctuations

53 Pages Posted: 11 Aug 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

Boston College

Multiple version iconThere are 4 versions of this paper

Date Written: August 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.

Suggested Citation

Drautzburg, Thorsten and Fernández-Villaverde, Jesús and Guerrón-Quintana, Pablo, Political Distribution Risk and Aggregate Fluctuations (August 2017). NBER Working Paper No. w23647. Available at SSRN: https://ssrn.com/abstract=3016917

Thorsten Drautzburg (Contact Author)

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

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics ( email )

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Philadelphia, PA 19104
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215-898-1504 (Phone)
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Pablo Guerrón-Quintana

Boston College

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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