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Mandatory spending, political polarization, and macroeconomic volatility

Daryna Grechyna ()

European Journal of Political Economy, 2021, vol. 68, issue C

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.

Keywords: Optimal fiscal policy; Political polarization; Mandatory and discretionary public spending (search for similar items in EconPapers)
JEL-codes: E6 H1 H3 H4 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: Mandatory Spending, Political Polarization, and Macroeconomic Volatility (2019) Downloads
Working Paper: Mandatory Spending, Political Polarization, and Macroeconomic Volatility (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:68:y:2021:i:c:s0176268020301385

DOI: 10.1016/j.ejpoleco.2020.101990

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