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The market price of fiscal uncertainty

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  • Croce, Mariano M.
  • Nguyen, Thien T.
  • Schmid, Lukas
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    Abstract

    Recent fiscal interventions have raised concerns about US public debt, future distortionary tax pressure, and long-run growth potential. We explore the long-run implications of public financing policies aimed at short-run stabilization when: (i) agents are sensitive to model uncertainty, as in Hansen and Sargent (2007), and (ii) growth is endogenous, as in Romer (1990). We find that countercyclical deficit policies promoting short-run stabilization reduce the price of model uncertainty at the cost of significantly increasing the amount of long-run risk. Ultimately these tax policies depress innovation and long-run growth and may produce welfare losses.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 59 (2012)
    Issue (Month): 5 ()
    Pages: 401-416

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    Handle: RePEc:eee:moneco:v:59:y:2012:i:5:p:401-416

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    Web page: http://www.elsevier.com/locate/inca/505566

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    9. Barillas, Francisco & Hansen, Lars Peter & Sargent, Thomas J., 2009. "Doubts or variability?," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2388-2418, November.
    10. Lubos Pastor & Pietro Veronesi, 2011. "Political Uncertainty and Risk Premia," NBER Working Papers 17464, National Bureau of Economic Research, Inc.
    11. Evan W. Anderson & Lars Peter Hansen & Thomas J. Sargent, 2003. "A Quartet of Semigroups for Model Specification, Robustness, Prices of Risk, and Model Detection," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 68-123, 03.
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    Cited by:
    1. Belo, Frederico & Yu, Jianfeng, 2013. "Government investment and the stock market," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 325-339.
    2. Lubos Pastor & Pietro Veronesi, 2011. "Political Uncertainty and Risk Premia," NBER Working Papers 17464, National Bureau of Economic Research, Inc.
    3. Kelly, Bryan & Pástor, Luboš & Veronesi, Pietro, 2014. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," CEPR Discussion Papers 9822, C.E.P.R. Discussion Papers.

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