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Electoral Uncertainty, Fiscal Policies and 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 Business School - Economics, University of Glasgow in its series Working Papers with number 2003_16.

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Date of creation: Sep 2003
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Handle: RePEc:gla:glaewp:2003_16

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Citations

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Cited by:
  1. Vasilev, Aleksandar, 2013. "On the cost of rent-seeking by government bureaucrats in a Real-Business-Cycle framework," SIRE Discussion Papers 2013-84, Scottish Institute for Research in Economics (SIRE).
  2. Marina Azzimonti, 2009. "Barriers to investment in polarized societies," 2009 Meeting Papers 1233, Society for Economic Dynamics.
  3. Aleksandar Vasilev, 2013. "Fiscal policy in a Real-Business-Cycle model with labor-intensive government services and endogenous public sector wages and hours," Working Papers 2013_18, Business School - Economics, University of Glasgow.

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