From Political Wedges to Debt Accumulation

From Political Wedges to Debt Accumulation | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article From Political Wedges to Debt Accumulation Siavash Mohades This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-9676850/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This paper develops a quantitative theory of how political distortions in fiscal policy generate public debt accumulation inside a currency union. The model has two member states that share a common monetary authority. The North government maximises resident welfare. The South government maximises a weighted average of welfare and incumbent vote share, which biases fiscal policy toward targeted transfers and away from broad public goods. The numerical solution closest to the fiscal block with a reduced-form stationary debt rule around calibrated debt targets. In the baseline calibration, the political distortion lowers South public goods by about 45% relative to a benevolent South government and implies a consumption-equivalent welfare cost of 3.23% per period. A one-time adverse South political shock raises South debt by 0.56% relative to its steady-state level at peak, equivalent to about 0.68 percentage points of steady-state South output. Eight consecutive adverse political shocks raise South debt by about 4.43% relative to steady-state debt, equivalent to about 5.37 percentage points of steady-state South output. Themechanism is a deterioration in the primary balance caused by politically motivated transfer expansion. This pattern is robust to alternative home bias, vote sensitivity, political transfer elasticity, and debt targets. Additional exercises show that tighter fiscal rules reduce debt volatility but do not remove the underlying distortion, while an endogenous sovereign spread breaks local determinacy under first-order perturbation. JEL Codes: E61; H63; F45; D72. Political distortions fiscal policy public debt currency union targeted transfers fiscal rules Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-9676850","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":638057594,"identity":"f102d1f1-c22f-4bfd-8f2a-5602af7a7a46","order_by":0,"name":"Siavash Mohades","email":"data:image/png;base64,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","orcid":"","institution":"Maastricht University","correspondingAuthor":true,"prefix":"","firstName":"Siavash","middleName":"","lastName":"Mohades","suffix":""}],"badges":[],"createdAt":"2026-05-11 08:38:38","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-9676850/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-9676850/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":109068086,"identity":"05ec59ab-3754-4c36-b7f0-e39e22b5c468","added_by":"auto","created_at":"2026-05-12 10:03:30","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":1027371,"visible":true,"origin":"","legend":"","description":"","filename":"PublicChoice.pdf","url":"https://assets-eu.researchsquare.com/files/rs-9676850/v1_covered_93a272fa-5702-44fb-849a-2ca4c655fd52.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"From Political Wedges to Debt Accumulation","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":true,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":false,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Political distortions, fiscal policy, public debt, currency union, targeted transfers, fiscal rules","lastPublishedDoi":"10.21203/rs.3.rs-9676850/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-9676850/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThis paper develops a quantitative theory of how political distortions in fiscal policy generate public debt accumulation inside a currency union. The model has two member states that share a common monetary authority. The North government maximises resident welfare. The South government maximises a weighted average of welfare and incumbent vote share, which biases fiscal policy toward targeted transfers and away from broad public goods. The numerical solution closest to the fiscal block with a reduced-form stationary debt rule around calibrated debt targets. In the baseline calibration, the political distortion lowers South public goods by about 45% relative to a benevolent South government and implies a consumption-equivalent welfare cost of 3.23% per period. A one-time adverse South political shock raises South debt by 0.56% relative to its steady-state level at peak, equivalent to about 0.68 percentage points of steady-state South output. Eight consecutive adverse political shocks raise South debt by about 4.43% relative to steady-state debt, equivalent to about 5.37 percentage points of steady-state South output. Themechanism is a deterioration in the primary balance caused by politically motivated transfer expansion. This pattern is robust to alternative home bias, vote sensitivity, political transfer elasticity, and debt targets. Additional exercises show that tighter fiscal rules reduce debt volatility but do not remove the underlying distortion, while an endogenous sovereign spread breaks local determinacy under first-order perturbation.\u003c/p\u003e\n\u003cp\u003eJEL Codes: E61; H63; F45; D72.\u003c/p\u003e","manuscriptTitle":"From Political Wedges to Debt Accumulation","msid":"","msnumber":"","nonDraftVersions":[{"code":1,"date":"2026-05-12 03:29:13","doi":"10.21203/rs.3.rs-9676850/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"920f2cd2-b66b-4d93-b290-4581f25ee0c0","owner":[],"postedDate":"May 12th, 2026","published":true,"recentEditorialEvents":[{"type":"decision","content":"Rejected","date":"2026-05-14T14:05:58+00:00","index":"","fulltext":""},{"type":"editorAssigned","content":"","date":"2026-05-14T11:09:48+00:00","index":"","fulltext":""},{"type":"checksComplete","content":"","date":"2026-05-14T11:09:25+00:00","index":"","fulltext":""},{"type":"submitted","content":"Public Choice","date":"2026-05-11T08:29:10+00:00","index":"","fulltext":""}],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2026-05-14T14:10:40+00:00","versionOfRecord":[],"versionCreatedAt":"2026-05-12 03:29:13","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v1","identity":"rs-9676850","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-9676850","identity":"rs-9676850","version":["v1"]},"buildId":"XKTyCvWXoU3ODBz1xrDgd","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}