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Mandatory Spending, Political Polarization, and Macroeconomic Volatility

Daryna Grechyna ()

MPRA Paper from University Library of Munich, Germany

Abstract: Political polarization combined with political turnover have been shown to amplify economic fluctuations (Azzimonti and Talbert, 2014). This paper analyzes a fiscal policy institution capable of reducing the volatility caused by these political frictions. We introduce the distinction between mandatory and discretionary public spending in a political model of optimal fiscal policy. We 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 the 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 simultaneous rise in political polarization and decline in the U.S output volatility after the 1980s.

Keywords: business cycles; optimal fiscal policy; mandatory and discretionary public spending; macroeconomic volatility; political economy; political polarization. (search for similar items in EconPapers)
JEL-codes: E62 H11 H30 H40 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pol
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Related works:
Journal Article: Mandatory spending, political polarization, and macroeconomic volatility (2021) Downloads
Working Paper: Mandatory Spending, Political Polarization, and Macroeconomic Volatility (2019) Downloads
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