To that end, they 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, the authors 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, the authors extend an otherwise standard neoclassical growth model. They model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. The authors calibrate the model to the U.S. corporate non-financial business sector and they back up the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. The authors show how the estimated shocks agree with the historical narrative evidence. They document that bargaining shocks account for 34% of aggregate fluctuations.
Political Distribution Risk and Aggregate Fluctuations
WP 17-25 - The authors argue that political distribution risk is an important driver of aggregate fluctuations.