TY  - JOUR
AU  - Bachmann,Ruediger
AU  - Bai,Jinhui
TI  - Government Purchases Over the Business Cycle: the Role of Economic and Political Inequality
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16247
PY  - 2010
Y2  - August 2010
UR  - http://www.nber.org/papers/w16247
L1  - http://www.nber.org/papers/w16247.pdf
N1  - Author contact info:
Ruediger Bachmann
Department of Economics
RWTH Aachen University
Templergraben 64
Aachen
Germany
Tel: +49 (241) 80-96203
E-Mail: ruediger-bachmann@gmx.de

Jinhui Bai
Department of Economics
Georgetown University
Washington, DC 20057-1036
E-Mail: jb543@georgetown.edu
AB  - 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.
ER  -