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Learning about fiscal policy and the effects of policy uncertainty

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  • Josef Hollmayr
  • Christian Matthes

Abstract

The recent crisis in the United States has often been associated with substantial amounts of policy uncertainty. In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model act as econometricians by estimating the policy rules for the different fiscal policy instruments, which include distortionary tax rates. ; Comparing the outcomes in our model to those under full-information rational expectations, we find that assuming the agents are not instantaneously aware of the new fiscal policy regime (or policy rule) in place leads to substantially more volatility in the short run and persistent differences in average outcomes

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-15.

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Date of creation: 2013
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Handle: RePEc:fip:fedrwp:13-15

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  1. Fernández-Villaverde, Jesús & Guerron-Quintana, Pablo A. & Kuester, Keith & Rubio-Ramírez, Juan Francisco, 2011. "Fiscal Volatility Shocks and Economic Activity," CEPR Discussion Papers 8528, C.E.P.R. Discussion Papers.
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Cited by:
  1. Davig, Troy A. & Foerster, Andrew T., 2014. "Uncertainty and fiscal cliffs," Research Working Paper RWP 14-4, Federal Reserve Bank of Kansas City.

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