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Electoral Uncertainty, Fiscal Policy and Macroeconomic Fluctuations

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  • Jim Malley
  • Apostolis Philippopoulos
  • Ulrich Woitek

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.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1593.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1593

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Keywords: political uncertainty; business cycles & growth; optimal policy; hybrid maximum likelihood estimation;

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