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Public Policy Against Political Frictions

Daryna Grechyna ()

MPRA Paper from University Library of Munich, Germany

Abstract: Recent research has demonstrated that political distortions can increase macroeconomic volatility. The aim of this paper is to analyze a fiscal policy institution capable of reducing the influence of such distortions on politically-driven fluctuations. We introduce the distinction between mandatory and discretionary public spending in the political model of optimal fiscal policy. We show that the different legislative nature of these components of government spending leads to a divergent impact of mandatory and discretionary spending on macroeconomic volatility. Increasing the fraction of mandatory spending in total government spending reduces the politically-driven volatility of income taxes, total government spending, consumption, labor, and output. Increasing the fraction of discretionary spending has the opposite effect. Our findings are supported by empirical evidence.

Keywords: optimal fiscal policy; mandatory and discretionary public spending; political polarization; political turnover; macroeconomic volatility. (search for similar items in EconPapers)
JEL-codes: E6 H10 H30 H40 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-mac and nep-pol
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