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


Zonder onderwerpscode: economie

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Identification in VARs has traditionally mainly relied on second moments. Some researchers have considered using higher moments as well, but there are concerns about the strength of the identification obtained in this way. In this paper, we propose refining existing identification schemes by augmenting sign restrictions with a requirement that rules out shocks whose higher moments significantly depart from independence. This approach does not assume that higher moments help with identification; it is robust to weak identification. In simulations we show that it controls coverage well, in contrast to approaches that assume that the higher moments deliver point-identification. However, it requires large sample sizes and/or considerable non-normality to reduce the width of confidence intervals by much. We consider some empirical applications. We find that it can reject many possible rotations. The resulting confidence sets for impulse responses may be non-convex, corresponding to disjoint parts of the space of rotation matrices. We show that in this case, augmenting sign and magnitude restrictions with an independence requirement can yield bigger gains.

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We argue that social and political risk causes significant aggregate fluctuations by changing workers' bargaining power. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks trigger output and unemployment movements. To quantify the aggregate importance of these distribution shocks, we extend an otherwise standard neoclassical growth economy. We model distribution shocks as exogenous changes in workers' bargaining power in a labor market with search and matching. We calibrate our economy to the U.S. corporate non-financial business sector, and we back out the evolution of workers' bargaining power. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 28% of aggregate fluctuations and have a welfare cost of 2.4% in consumption units.