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

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  • George Economides
  • Jim Malley
  • Apostolis Philippopoulos
  • Ulrich Woitek

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.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1072.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1072

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

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  17. Campbell, John, 1994. "Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model," Scholarly Articles 3196342, Harvard University Department of Economics.
  18. Park, Hyun & Philippopoulos, Apostolis, 2003. "On the dynamics of growth and fiscal policy with redistributive transfers," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 515-538, March.
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Cited by:
  1. George Economides & Apostolis Philippopoulos & Simon Price, 2002. "Elections, Fiscal Policy and Growth: Revisiting the Mechanism," CESifo Working Paper Series 691, CESifo Group Munich.

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