Aggregate uncertainty, political instability and income redistribution

This paper associates political instability with real shocks affecting the income of the median voter, in a two-period model where two political parties set redistribution in order to defend the interests of well-defined constituencies. Current policies affect future voting outcomes and an intertemporal trade-off arises for the parties since their optimal one-period strategy does not maximize the probability of being re-elected. The higher the volatility of the real shock, the more likely that parties deviate from the optimal one-period strategy by choosing a conservative strategy, which increases their chances of re-election and the expected lifetime utility of their constituencies.