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Government Purchases Over the Business Cycle: the Role of Economic and Political Inequality

By Ruediger Bachmann and Jinhui H. Bai

Abstract

This paper explores the implications of economic and political inequality for the business cycle comovement of government purchases. We set up and compute a heterogeneousagent neoclassical growth model, where households value government purchases which are financed by income taxes. A key feature of the model is a wealth bias in the political aggregation process. When calibrated to U.S. wealth inequality and exposed to aggregate productivity shocks, such a model is able to generate milder procyclicality of government purchases than models with no political wealth bias. The degree of wealth bias that matches the observed mild procyclicality of government purchases in the data, is consistent with cross-sectional data on political participation

Topics: JEL Codes, E30, E32, E60, E62, H30. Keywords, government purchases, wealth bias, economic inequality, political inequality, heterogeneous agents, politico-economic equilibrium
Year: 2010
OAI identifier: oai:CiteSeerX.psu:10.1.1.170.9248
Provided by: CiteSeerX
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