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A theory of political and economic cycles

Laurence Ales, Pricila Maziero and Pierre Yared

Journal of Economic Theory, 2014, vol. 153, issue C, 224-251

Abstract: We develop a theoretical framework in which political and economic cycles are jointly determined. These cycles are driven by three political economy frictions: policymakers are non-benevolent, they cannot commit to policies, and they have private information about the tightness of the government budget and rents. Our first main result is that, in the most favorable equilibrium to the households, distortions to production emerge and never disappear even in the long run. This result is driven by the interaction of limited commitment and private information on the side of the policymaker, since in the absence of either friction, there are no long run distortions to production. Our second result is that, if the variance of private information is sufficiently large, there is equilibrium turnover in the long run so that political cycles never disappear. Finally, our model produces a long run distribution of taxes, distortions, and turnover, where these all respond persistently to temporary economic shocks.

Keywords: Optimal taxation; Political economy; Fiscal policy; Asymmetric and private information (search for similar items in EconPapers)
JEL-codes: D82 E62 H21 P16 (search for similar items in EconPapers)
Date: 2014
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Working Paper: A Theory of Political and Economic Cycles (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:153:y:2014:i:c:p:224-251

DOI: 10.1016/j.jet.2014.07.004

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