Electoral Uncertainty, Fiscal Policies and Growth: Theory and Evidence from Germany, the UK and the US

George Economides, Jim Malley, Apostolis Philippopoulos and Ulrich Woitek

Working Papers from Business School - Economics, University of Glasgow

Abstract: In this paper we study the link between elections, fiscal policy and economic growth/fluctuations. The set-up is a dynamic stochastic general equilibrium model of growth and endogenously chosen fiscal policy, in which two political parties can alternate in power. The party in office chooses jointly how much to tax and how to allocate its total expenditure between public consumption and production services. The main theoretical prediction is that forward-looking incumbents, with uncertain prospects of re-election, find it optimal to follow relatively shortsighted fiscal policies, and that this lowers economic growth. The model is estimated using quarterly data for Germany, the UK and the US from 1960 to 1999. Our econometric results provide clear support for the main theoretical prediction. They also give plausible and significant estimates for the productivity of public production services, the weight which households place on public consumption services relative to private consumption and the time discount rate. Moreover, we find that changes in electoral uncertainty produce the longest lasting fluctuations in the European economies followed by the US.

JEL-codes: D9 E6 H1 H5 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2003_16

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