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Political Distribution Risk and Aggregate Fluctuations

Thorsten Drautzburg, Jesus Fernandez-Villaverde () and Pablo Guerron

No 17-25, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We argue that political distribution risk is an important driver of aggregate fluctuations. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output and asset prices. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output, unemployment, and sectoral asset prices. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back up the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 34% of aggregate fluctuations.

Keywords: Political redistribution risk; bargaining shocks; aggregate fluctuations; partial filter; historical narrative (search for similar items in EconPapers)
JEL-codes: E32 E37 E44 J20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
Date: 2017-08-21
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Working Paper: Political Distribution Risk and Aggregate Fluctuations (2017) Downloads
Working Paper: Political Distribution Risk and Aggregate Fluctuations (2017) Downloads
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