Fiscal Policy, Endogenous Political Uncertainty and Economic Fluctuations

31 Pages Posted: 22 May 2015

See all articles by Abhinash Borah

Abhinash Borah

Ashoka University

Jonathan Pogach

FDIC, Division of Insurance and Research

Date Written: August 16, 2014

Abstract

We argue that when fiscal policy is endogenously determined, the incentives of redistributive politics associated with its formulation can endogenously add to the uncertainty and volatility that an economy faces. In particular, small shocks may get translated into large fluctuations. Our analysis considers a dynamic model of fiscal policy formulation and redistributive politics in which the economy's fundamentals are subject to small and transitory shocks. Though optimal fiscal policy under commitment can insulate the economy from fluctuations, we show that under endogenous policy determined by majority rule voting, the economy can transition between states of high and low redistribution with concomitant fluctuations in investment and output.

Keywords: endogenous fiscal policy, redistributive politics, political uncertainty, economic fluctuations and volatility

JEL Classification: E62, E32, H31, D72, P16

Suggested Citation

Borah, Abhinash and Pogach, Jonathan, Fiscal Policy, Endogenous Political Uncertainty and Economic Fluctuations (August 16, 2014). Available at SSRN: https://ssrn.com/abstract=2608907 or http://dx.doi.org/10.2139/ssrn.2608907

Abhinash Borah (Contact Author)

Ashoka University ( email )

University Campus, Plot #2,
Rajiv Gandhi Education City
Kundli, Haryana 131028
India

Jonathan Pogach

FDIC, Division of Insurance and Research ( email )

550 17th Street NW
Washington, DC 20429
United States

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