Mandatory Spending, Political Polarization, and Macroeconomic Volatility

Daryna Grechyna

No 19/05, ThE Papers from Department of Economic Theory and Economic History of the University of Granada.

Abstract: This paper studies the relationship between the structure of public spending and political frictions in a political model of optimal fiscal policy. I consider the distinction between mandatory and discretionary public spending and show that different legislative nature of these components of government spending leads to a divergent impact of mandatory and discretionary spending on politically-driven macroeconomic volatility. Increasing the fraction of mandatory spending in total government spending reduces volatility; increasing the fraction of discretionary spending has the opposite effect. The presence of the legislative requirements behind the changes in mandatory public spending can explain the simultaneous rise in political polarization and decline in the U.S output volatility after the 1980s.

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)
Pages: 29 pages
Date: 2019-06-11
New Economics Papers: this item is included in nep-mac
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http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers19_05.pdf (application/pdf)

Related works:
Journal Article: Mandatory spending, political polarization, and macroeconomic volatility (2021)
Working Paper: Mandatory Spending, Political Polarization, and Macroeconomic Volatility (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:gra:wpaper:19/05

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