Electoral Uncertainty, Fiscal Policies & Growth: Theory and Evidence from Germany, the UK and the Us

42 Pages Posted: 11 Nov 2003

See all articles by George Economides

George Economides

Athens University of Economics and Business - Department of International and European Economic Studies

Jim Malley

University of Glasgow - Department of Economics

Apostolis Philippopoulos

Athens University of Economics and Business - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); University of Essex

Ulrich Woitek

University of Zurich

Date Written: November 2003

Abstract

In this paper we study the link between elections, fiscal policy and economic growth/fluctuations. The set-up is a dynamic stochastic general equilibrium model of growth and endogenously chosen fiscal policy, in which two political parties can alternate in power. The party in office chooses jointly how much to tax and how to allocate its total expenditure between public consumption and production services. The main theoretical prediction is that forward-looking incumbents, with uncertain prospects of re-election, find it optimal to follow relatively shortsighted fiscal policies, and that this lowers economic growth. The model is estimated using quarterly data for Germany, the UK and the US from 1960 to 1999. Our econometric results provide clear support for the main theoretical prediction. They also give plausible and significant estimates for the productivity of public production services, the weight which households place on public consumption services relative to private consumption and the time discount rate. Moreover, we find that changes in electoral uncertainty produce the longest lasting fluctuations in the European economies followed by the US.

Keywords: political uncertainty, economic growth and fluctuations, optimal policy

JEL Classification: D9, E6, H1, H5

Suggested Citation

Economides, George and Malley, Jim and Philippopoulos, Apostolis and Woitek, Ulrich, Electoral Uncertainty, Fiscal Policies & Growth: Theory and Evidence from Germany, the UK and the Us (November 2003). Available at SSRN: https://ssrn.com/abstract=466080 or http://dx.doi.org/10.2139/ssrn.466080

George Economides

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

GR-10434 Athens
Greece
+30-210-8214122 (Phone)
+30-210-8203729 (Fax)

Jim Malley

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom
+44 141 330 4617 (Phone)
+44 141 330 4940 (Fax)

HOME PAGE: http://www.gla.ac.uk/economics/malley/

Apostolis Philippopoulos

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+301 322 3187 (Phone)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Ulrich Woitek (Contact Author)

University of Zurich ( email )

Zürichbergstrasse 14
CH-8032 Zurich
Switzerland

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