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Growth, Unemployment, and Fiscal Policy: A Political Economy Analysis

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  • Tetsuo Ono

    () (Graduate School of Economics, Osaka University)

Abstract

This study presents an overlapping-generations model featuring capital accumu- lation, collective wage-bargaining, and probabilistic voting over fiscal policy. We characterize a Markov-perfect political equilibrium of the voting game within and across generations and show the following results. First, greater bargaining power of unions lowers the growth rate of capital and creates a positive correlation between unemployment and public debt. Second, greater political power of the old lowers the growth rate and shifts government expenditure from the unemployed to the old. Third, when the government finances its spending by issuing public debt, an introduction of a balanced-budget requirement increases the growth rate but may benefit the old at the expense of the unemployed.

Suggested Citation

  • Tetsuo Ono, 2014. "Growth, Unemployment, and Fiscal Policy: A Political Economy Analysis," Discussion Papers in Economics and Business 14-30-Rev., Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Sep 2015.
  • Handle: RePEc:osk:wpaper:1430r
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    More about this item

    Keywords

    Economic Growth; Fiscal Policy; Government Debt; Unemployment; Voting;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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