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

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Author Info
George Economides
Jim Malley
Apostolis Philippopoulos
Ulrich Woitek

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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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Paper provided by Department of 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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Find related papers by JEL classification:
D9 - Microeconomics - - Intertemporal Choice and Growth
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
H1 - Public Economics - - Structure and Scope of Government
H5 - Public Economics - - National Government Expenditures and Related Policies

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