The stabilization role of police spending in a neo-Keynesian economy with credit market imperfections

Motivated by a seemingly persistent “twin-high” phenomenon in Latin America, we present a novel theoretical framework that has linkages between three institutions (education, criminal justice, and credit) to study policy-pertinent research questions with regards to whether police spending has the potential to serve as an unconventional policy tool for macroeconomic management. Based on a stylized parameterization, we find formal and illegal human capital to share common cyclical properties, which can be "decoupled" under a rule-based regime to police spending. This nonetheless comes at a cost of a greater propagation of the credit friction-induced financial accelerator effect.