The stabilization role of police spending in a neo‐Keynesian economy with credit market imperfections

Pengfei Jia and King Yoong Lim

Scottish Journal of Political Economy, 2021, vol. 68, issue 1, 103-125

Abstract: Motivated by a seemingly persistent “twin‐high” phenomenon in Latin America, we present a novel theoretical framework that has linkages between three institutions (education, criminal justice, and credit) to study policy‐pertinent research questions with regards to whether police spending has the potential to serve as an unconventional policy tool for macroeconomic management. Based on a stylized parameterization, we find formal and illegal human capital to share common cyclical properties, which can be "decoupled" under a rule‐based regime to police spending. This nonetheless comes at a cost of a greater propagation of the credit friction‐induced financial accelerator effect.

Date: 2021
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