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Government Purchases Over the Business Cycle: the Role of Economic and Political Inequality

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  • Ruediger Bachmann
  • Jinhui Bai

Abstract

This paper explores the implications of economic and political inequality for the business cycle comovement of government purchases. We set up and compute a heterogeneous-agent neoclassical growth model, where households value government purchases which are financed by income taxes. A key feature of the model is a wealth bias in the political aggregation process. When calibrated to U.S. wealth inequality and exposed to aggregate productivity shocks, such a model is able to generate milder procyclicality of government purchases than models with no political wealth bias. The degree of wealth bias that matches the observed mild procyclicality of government purchases in the data, is consistent with cross-sectional data on political participation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16247.

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Date of creation: Aug 2010
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Publication status: published as Member of the program committee of the 2010 SE D meetings in Montreal, 2011 in Gent and 2012 in Limassol. Member of the refereeing team for the 2011 annual meeting of the German Economic Association. External reviewer for professorial hirings at German universities ( externe Berufungsgutachten ) External reviewer for junior professo r evaluations at German universities ( externe Zwischenevaluationen ) Publications: “Inflation Expectations and Readiness to Spe nd: Cross-Sectional Evidence”, joint with T. Berg (IFO) and E. Sims (University of Notre Dame). Forthcoming in the American Economic Journal: Economic Policy. Featured in The American Conservative and the Neue Züricher Zeitung (NZZ). Presented to the presid ent of the Federal Reserve Bank of Cleveland during a special advisory meeting on infla tion and inflation expectations. Formerly circulating as NBER WP 17958. “Investment Dispersion and the Business Cycle”, joint with C. Bayer (University of Bonn). Forthcoming in the American Economic Review, April 2014 edition. Formerly circulating as NBER WP 16861, and CESIFO-WP 2810 “The Cr oss-section of Firms over the Business Cycle: New Facts and a DSGE Exploration”. “Wait-and-See Business Cycles?”, joint with C. Bayer (University of Bonn), Journal of Monetary Economics (2013), Vol. 60(6), 704-719. Formerly circulating as “Uncertainty Business Cycles – Really?”, NBER WP 16862, and CESIFO-WP 2844 “Firm-Specific Productivity Risk over the Business Cycle: Facts and Aggregate Implications”. “Public Consumption over the Business Cycle”, jo int with J. Bai (Georgetown University). Quantitative Economics (2013), 4, 417-451. Formerly circul ating as NBER WP 17230. “Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model”, joint with R. Caballero (MIT) and E. Engel (Yale), American Economic Journal: Macroeconomics (2013), Vol. 5(4), 29-67. Formerly circulating as “Lumpy Investment in Dynamic General Equilibrium“, NBER WP 12336. “Politico-economic Inequality a nd the Comovement of Government Purchases”, joint with J. Bai (Georgetown University), Review of Economic Dynamics (2013), Vol. 16(4), 565-580, lead article. Formerly circulating as “Gove rnment Purchases over the Business Cycle: the Role of Economic and Political Inequality”, NBER WP 16247.
Handle: RePEc:nbr:nberwo:16247

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Cited by:
  1. Marina Azzimonti & Matthew Talbert, 2011. "Partisan cycles and the consumption volatility puzzle," Working Papers 11-21, Federal Reserve Bank of Philadelphia.
  2. Daniel R. Carroll, 2013. "The demand for income tax progressivity in the growth model," Working Paper 1106, Federal Reserve Bank of Cleveland.
  3. Marco Bassetto & Leslie McGranahan, 2011. "On the Relationship Between Mobility, Population Growth, and Capital Spending in the United States," NBER Working Papers 16970, National Bureau of Economic Research, Inc.
  4. Marina Azzimonti, 2013. "The dynamics of public investment under persistent electoral advantage," Working Papers 13-43, Federal Reserve Bank of Philadelphia.
  5. Battaglini, Marco, 2011. "A Dynamic theory of electoral competition," CEPR Discussion Papers 8633, C.E.P.R. Discussion Papers.

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