IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

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

  • Ruediger Bachmann
  • Jinhui Bai

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

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

in new window

Date of creation: Aug 2010
Date of revision:
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
Note: EFG
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Fatih Guvenen & Anthony Smith, 2010. "Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach," NBER Working Papers 16327, National Bureau of Economic Research, Inc.
  2. Jinhui Bai & Roger Lagunoff, 2007. "On the “Faustian” Dynamics of Policy and Political Power," Levine's Bibliography 122247000000001627, UCLA Department of Economics.
  3. Javier Díaz-Giménez & Vincenzo Quadrini & José-Víctor Ríos-Rull, 1997. "Dimensions of inequality: facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-21.
  4. Marco Battaglini & Stephen Coate, 2006. "A Dynamic Theory of Public Spending, Taxation and Debt," NBER Working Papers 12100, National Bureau of Economic Research, Inc.
  5. Ilzetzki, Ethan, 2011. "Rent-seeking distortions and fiscal procyclicality," Journal of Development Economics, Elsevier, vol. 96(1), pages 30-46, September.
  6. Hassler, John & Mora, José V Rodríguez & Storesletten, Kjetil & Zilibotti, Fabrizio, 2001. "The Survival of the Welfare State," CEPR Discussion Papers 2905, C.E.P.R. Discussion Papers.
  7. Mark Aguiar & Manuel Amador, 2011. "Growth in the Shadow of Expropriation," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 651-697.
  8. Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 1006-1036, 09.
  9. Marco Bassetto & Jess Benhabib, 2006. "Redistribution, Taxes, and the Median Voter," 2006 Meeting Papers 78, Society for Economic Dynamics.
  10. Campante, Filipe R., 2011. "Redistribution in a model of voting and campaign contributions," Journal of Public Economics, Elsevier, vol. 95(7), pages 646-656.
  11. Heathcote, Jonathan, 1999. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," SSE/EFI Working Paper Series in Economics and Finance 319, Stockholm School of Economics, revised 28 Jul 1999.
  12. marina, azzimonti, 2009. "Barriers to investment in polarized societies," MPRA Paper 25936, University Library of Munich, Germany.
  13. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  14. Dean Corbae, 2007. "Politico-Economic Consequences of Rising Wage Inequality," 2007 Meeting Papers 129, Society for Economic Dynamics.
  15. Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers 916, Board of Governors of the Federal Reserve System (U.S.).
  16. Emannauel Farhi & Ivan Werning, 2006. "Capital Taxation," 2006 Meeting Papers 455, Society for Economic Dynamics.
  17. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Power fluctuations and political economy," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1009-1041, May.
  18. Song, Zheng & Storesletten, Kjetil & Zilibotti, Fabrizio, 2007. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," Memorandum 05/2008, Oslo University, Department of Economics.
  19. Paul Klein & Per Krusell & José-V�ctor R�os-Rull, 2008. "Time-Consistent Public Policy," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 789-808.
  20. Marco Battaglini, 2009. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," 2009 Meeting Papers 131, Society for Economic Dynamics.
  21. Jinhui H. Bai & Roger Laguno ff, 2010. "Revealed Political Power," Levine's Working Paper Archive 661465000000000106, David K. Levine.
  22. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  23. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
  24. Barseghyan, Levon & Battaglini, Marco & Coate, Stephen, 2013. "Fiscal policy over the real business cycle: A positive theory," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2223-2265.
  25. Hassler, John & Krusell, Per & Storesletten, Kjetil & Zilibotti, Fabrizio, 2005. "The dynamics of government," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1331-1358, October.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16247. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.