Working Paper: NBER ID: w16247
Authors: Ruediger Bachmann; Jinhui 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 heterogeneous-agent 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.
Keywords: Government Purchases; Economic Inequality; Political Inequality; Business Cycle
JEL Codes: E30; E32; E60; E62; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political aggregation mechanism (D72) | dampening of procyclicality during economic booms (E32) |
| wealth inequality (D31) | lower-income agents gain more political power during economic booms (P16) |
| degree of wealth bias (D31) | contemporaneous correlation between output and government purchases (E62) |
| political influence of wealthier versus poorer agents (D72) | wealthier agents lose influence during economic booms (F61) |