Abstract
Four stylized facts motivate this paper: (i) business cycle movements are wider in emerging countries (EC) than in developed ones; (ii) EC experience greater economic policy uncertainty; (iii) EC are more polarized and less politically stable; and (iv) EPU is positively related to political polarization. A standard real business cycle model augmented to incorporate political polarization, a ‘polarized business cycle’ (PBC) model, is shown to be consistent with these facts. We first derive our results analytically, and then quantify the effects of a permanent increase in polarization to the US economy.
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