Research Archive

A Theory of Political and Economic Cycles

Laurence Ales, Pricila Maziero, Pierre Yared

Publication type: Journal article

Research Archive Topic: Business Economics and Public Policy, Corporate Finance

Abstract

We develop a theoretical framework in which political and economic cycles are jointly determined. These cycles are driven by three political economy frictions: policymakers are non-benevolent, they cannot commit to policies, and they have private information about the tightness of the government budget and rents. Our first main result is that, in the best sustainable equilibrium, distortions to production emerge and never disappear even in the long run. This result is driven by the interaction of limited commitment and private information on the side of the policymaker, since in the absence of either friction, there are no long run distortions to production. Our second result is that, if the variance of private information is sufficiently large, there is equilibrium turnover in the long run so that political cycles never disappear. Finally, our model produces a long run distribution of taxes, distortions, and turnover, where these all respond persistently to temporary economic shocks.
Download PDF

Citation

Ales, Laurence, Pricila Maziero, and Pierre Yared. "A Theory of Political and Economic Cycles." Journal of Economic Theory 153 (2014): 224-251.


Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.

Each topic is linked to an index of publications on that topic.