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Political Uncertainty, Public Expenditure and Growth

  • V. Anton Muscatelli
  • Julia Darby
  • Chol-Won Li

We focus on the link between political instability due to uncertain electoral outcomes and economic growth, through the impact on a government's decisions on how to allocate government expenditure between public consumption and investment. Using an endogenous growth model with partisan electoral effects, we demonstrate that political uncertainty will generate a steady-state equilibrium growth rate which is inefficient and too low. We also use a newly-constructed political data set to estimate panel regressions for several OECD economies over a period 1960-95. Our empirical evidence on the effects of political variables on tax and spending decisions supports our theoretical results.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 9822.

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