Discussion Paper Details

Please find the details for DP12187 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Political Distribution Risk and Aggregate Fluctuations

Author(s): Thorsten Drautzburg, Jesús Fernández-Villaverde and Pablo A. Guerron-Quintana

Publication Date: July 2017

Keyword(s): Aggregate fluctuations, bargaining shocks, historical narrative, partial filter and Political redistribution risk

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We argue that political distribution risk is an important driver of aggregate fluctuations. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output and asset prices. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output, unemployment, and sectoral asset prices. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back up the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 34% of aggregate fluctuations.

For full details and related downloads, please visit:

Bibliographic Reference

Drautzburg, T, Fernández-Villaverde, J and Guerron-Quintana, P. 2017. 'Political Distribution Risk and Aggregate Fluctuations'. London, Centre for Economic Policy Research.