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Quantifying the Impact of Political Frictions on Public Policy

Grechyna, Daryna (2015): Quantifying the Impact of Political Frictions on Public Policy.

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We study the role of political frictions in fiscal policy outcomes. We propose a simple model of fiscal policy that combines a lack of commitment by the government, political turnover, and another political friction which can be interpreted either as political polarization or as public rent-seeking. We show that political turnover increases public debt levels, while political polarization or public rent-seeking lead to higher public spending. We evaluate the importance of different political frictions for fiscal policy outcomes using a sample of twenty developed countries. We find that the presence of political turnover is crucial for accounting for the variation in public debt levels and that public corruption measures outperform the political polarization measures in explaining the variation in fiscal variables.

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