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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.

Suggested Citation

  • Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2005. "Electoral Uncertainty, Fiscal Policy and Macroeconomic Fluctuations," CESifo Working Paper Series 1593, CESifo.
    • Handle: RePEc:ces:ceswps:_1593
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    More about this item

    Keywords

    political uncertainty; business cycles & growth; optimal policy; hybrid maximum likelihood estimation;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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