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Polarized business cycles

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  • Marina Azzimonti-Renzo

Abstract

We are motivated by four stylized facts computed for emerging and developed economies: (i) business cycle movements are wider in emerging countries; (ii) economies in emerging countries experience greater economic policy uncertainty; (iii) emerging economies are more polarized and less politically stable; and (iv) economic policy uncertainty is positively related to political polarization. We show that a standard real business cycle (RBC) model augmented to incorporate political polarization, a `polarized business cycle' (PBC) model, is consistent with these facts. Our main hypothesis is that fluctuations in economic variables are not only caused by innovations to productivity, as traditionally assumed in macroeconomic models, but also by shifts in political ideology. Switches between left-wing and right-wing governments generate uncertainty about the returns to private investment, and this affects real economic outcomes. Since emerging economies are more polarized than developed ones, the effects of political turnover are more pronounced. This translates into higher economic policy uncertainty and amplifies business cycles. We derive our results analytically by fully characterizing the long-run distribution of economic and fiscal variables. We then analyze the effect of a permanent increase in polarization on PBCs.

Suggested Citation

  • Marina Azzimonti-Renzo, 2013. "Polarized business cycles," Working Papers 13-44, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:13-44
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Polarized business cycles
      by Christian Zimmermann in NEP-DGE blog on 2013-12-22 07:50:50
    2. Political polarization and the business cycle
      by Economic Logician in Economic Logic on 2014-01-06 21:53:00

    Citations

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    Cited by:

    1. Azzimonti, Marina, 2018. "Partisan conflict and private investment," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 114-131.
    2. Grechyna, Daryna, 2015. "On Determinants of Political Polarization," MPRA Paper 67611, University Library of Munich, Germany.
    3. Grechyna, Daryna, 2016. "The Structure of Government Spending and the Business Cycle," MPRA Paper 72029, University Library of Munich, Germany.
    4. Grechyna, Daryna, 2016. "On the determinants of political polarization," Economics Letters, Elsevier, vol. 144(C), pages 10-14.
    5. Ellen McGrattan, 2016. "Intangible Capital and Measured Productivity," 2016 Meeting Papers 62, Society for Economic Dynamics.
    6. repec:eee:ecolet:v:158:y:2017:i:c:p:47-50 is not listed on IDEAS
    7. Marina Azzimonti, 2015. "The dynamics of public investment under persistent electoral advantage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 653-678, July.
    8. Mickael Melki & Andrew Pickering, 2016. "Polarization and Corruption in America," Discussion Papers 16/09, Department of Economics, University of York.
    9. repec:eee:pubeco:v:164:y:2018:i:c:p:225-240 is not listed on IDEAS
    10. Funke, Manuel & Schularick, Moritz & Trebesch, Christoph, 2016. "Going to extremes: Politics after financial crises, 1870–2014," European Economic Review, Elsevier, vol. 88(C), pages 227-260.
    11. Grechyna, Daryna, 2017. "Mandatory Spending, Political Polarization, and Macroeconomic Volatility," MPRA Paper 83452, University Library of Munich, Germany.
    12. repec:wly:iecrev:v:59:y:2018:i:2:p:479-510 is not listed on IDEAS
    13. Marina Azzimonti, 2018. "The Politics Of Fdi Expropriation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 479-510, May.
    14. Grechyna, Daryna, 2017. "Political Instability: The Neighbor vs. the Partner Effect," MPRA Paper 79952, University Library of Munich, Germany.
    15. Grechyna, Daryna, 2017. "Public Policy Against Political Frictions," MPRA Paper 76396, University Library of Munich, Germany.
    16. Grechyna, Daryna, 2016. "Political frictions and public policy outcomes," Journal of Comparative Economics, Elsevier, vol. 44(3), pages 484-495.
    17. Marina Azzimonti, 2015. "The dynamics of public investment under persistent electoral advantage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 653-678, July.
    18. Marina Azzimonti, 2016. "Does Partisan Conflict Deter FDI Inflows to the US?," NBER Working Papers 22336, National Bureau of Economic Research, Inc.
    19. Cheng, Chak Hung Jack & Hankins, William B. & Chiu, Ching-Wai (Jeremy), 2016. "Does US partisan conflict matter for the Euro area?," Economics Letters, Elsevier, vol. 138(C), pages 64-67.

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    Keywords

    Business cycles ; Economic policy ; Uncertainty;

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