Working Paper

Political Uncertainty, Public Expenditure and Growth

Julia Darby, Chol-Won Li, Anton Muscatelli
CESifo, Munich, 2000

CESifo Working Paper No. 310

We focus on the link between political instability due to uncertain electoral outcomes and economic growth, through the impact on a government's decisions on how to allocate government expenditure between public consumption and investment. Using an endogenous growth model with partisan electoral effects, we demonstrate that political uncertainty will generate a steady-state equilibrium growth rate which is inefficient and too low. We also use a newly-constructed political data set to estimate panel regressions for several OECD economies over a period 1960-95. Our empirical evidence on the effects of political variables on tax and spending decisions supports our theoretical results.

Keywords: Endogenous growth, public consumption and investment, political uncertainty, panel regressions, OECD countries