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Partisan cycles and the consumption volatility puzzle ∗ (2011)
BibTeX
@MISC{Azzimonti11partisancycles,
author = {Marina Azzimonti and Matthew Talbert},
title = {Partisan cycles and the consumption volatility puzzle ∗},
year = {2011}
}
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Abstract
Standard real business cycle theory predicts consumption should be smoother than output, as observed in developed countries. In this paper we provide a novel explanation of the consumption volatility puzzle based on political frictions. We develop a dynamic stochastic political economy model where parties that disagree on the size of government (right-wing and left-wing) alternate in power and face aggregate uncertainty. While productivity shocks only affect consumption through responses to output, political shocks (switches in political ideology) change the composition between private and public consumption for a given output size via changes in the level of taxes. As emerging economies are characterized by less stable governments and more polarized societies the effects of political shocks are more pronounced. For a reasonable set of parameters we confirm the empirical relationship between political polarization and the ratio of consumption volatility to output volatility across countries. JEL Classification:
Keyphrases
consumption volatility puzzle partisan cycle political shock consumption volatility political ideology reasonable set stable government public consumption jel classification face aggregate uncertainty novel explanation political polarization dynamic stochastic political economy model political friction productivity shock output volatility output size empirical relationship standard real business cycle theory polarized society developed country
