Technical Report Growth, Unemployment, and Fiscal Policy: A Political Economy Analysis

Ono, Tetsuo

14-30-pp.1 - 35 , 2015-09 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
* Revised: [14-30, 2014]
This study presents an overlapping-generations model featuring endogenous growth, collective wage-bargaining, and probabilistic voting over fiscal policy. We characterize a Markov-perfect political equilibrium of the voting game within and across generations and show the following results. First, greater bargaining power of unions lowers the growth rate of capital and creates a positive correlation between unemployment and government debt. Second, greater political power of the old lowers the growth rate and shifts government expenditure from the unemployed to the old. Third, a balanced budget requirement increases the growth rate but may benefit the old at the expense of the unemployed.

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