Public Policy Against Political Frictions

Grechyna, Daryna (2017): Public Policy Against Political Frictions.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: optimal fiscal policy, mandatory and discretionary public spending, political polarization, political turnover, macroeconomic volatility.
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; H - Public Economics > H1 - Structure and Scope of Government > H10 - General; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General; H - Public Economics > H4 - Publicly Provided Goods > H40 - General

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