Mandatory spending,political polarization,and macroeconomic volatility |
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Affiliation: | 1. University of Louisiana at Lafayette, USA;2. University of Arkansas at Little Rock, USA;1. Department of Economics, U.S. Naval Academy, USA;2. FAME|GRAPE, ul. Mazowiecka 11/14, 00-052, Warsaw, Poland;1. Department of Economics and Law, Korea Military Academy, 574 Hwarang-ro, Seoul, Republic of Korea;2. School of Economic, Political & Policy Science, University of Texas at Dallas, 800 W. Campbell Rd., Richardson, TX, 75080, USA;1. Department of Public Finance, Poznań University of Economics and Business, al. Niepodległości 10, 61-875, Poznań, Poland;2. Department of Economics, University of Kassel, Nora-Platiel-Strasse 4, 34109, Kassel, Germany |
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Abstract: | This paper studies the impact of political polarization on macroeconomic volatility in a political economy model of optimal fiscal policy. I introduce the distinction between mandatory and discretionary public spending in a model where consumers disagree on the size of the public sector. In the presence of political turnover and political polarization, public policies that affect individual decision-making lead to macroeconomic volatility. I show that the legislative requirements behind the changes in mandatory public spending can reduce macroeconomic volatility caused by political polarization and political turnover. The numerical simulations of the model suggest that in the presence of a binding constraint on the changes in mandatory spending, an increase in the political polarization is associated with an increase in the share of mandatory spending and a decrease in the macroeconomic volatility, consistent with the U.S. data. |
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Keywords: | Optimal fiscal policy Political polarization Mandatory and discretionary public spending E6 H1 H3 H4 |
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