Business Cycles with Revolutions
Abstract: This paper develops an empirical macroeconomic framework to analyze the relationship between major political disruptions and business cycles of a country. We combine a new dataset of mass unrests across the world from 1960 to 2006, with macro data (output, investment, trade, inflation and exchange rate). We then build a panel vector-autoregression model with two novel ingredients: (1) mass unrests and (2) an estimated probability of such unrests. We find that both terms have statistically and economically significant impacts on business cycles: (1) Periods of mass unrests have an average impact of a moderate rare disaster; (2) More importantly, the estimated probability of mass unrests amplifies and propagates economic and political shocks. The second result suggests that our measure of political risk captures an important source of time-varying uncertainty and volatility in many countries.
