Electoral Uncertainty, Fiscal Policy and Macroeconomic Fluctuations
40 Pages Posted: 5 Dec 2005
Date Written: November 2005
Abstract
In this paper we study the link between elections, fiscal policy and aggregate fluctuations. The set-up is a stylized dynamic stochastic general equilibrium model incorporating both technology and political re-election shocks. The later are incorporated via a two-party model with elections. 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 hurts capital accumulation. Our econometric estimation, using U.S. data, finds a statistically significant link between electoral uncertainty and policy instruments and in turn macroeconomic outcomes.
Keywords: political uncertainty, business cycles & growth, optimal policy, hybrid maximum likelihood estimation
JEL Classification: D9, E6, H1, H5
Suggested Citation: Suggested Citation
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