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Fiscal Volatility Shocks and Economic Activity

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  • Jesús Fernández-Villaverde
  • Pablo A. Guerrón-Quintana
  • Keith Kuester
  • Juan Rubio-Ramírez

Abstract

We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fiscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, we first estimate tax and spending processes for the U.S. that allow for time-varying volatility. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17317.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17317

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Two papers on policy uncertainty and learning
    by Christian Zimmermann in NEP-DGE blog on 2011-08-27 11:10:04
  2. The impact of fiscal uncertainty
    by Economic Logician in Economic Logic on 2011-09-09 14:07:00
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Cited by:
  1. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen J. Terry, 2012. "Really Uncertain Business Cycles," NBER Working Papers 18245, National Bureau of Economic Research, Inc.
  2. Jesús Fernández-Villaverde & Pablo A. Guerrón-Quintana & Juan Rubio-Ramírez, 2011. "Supply-Side Policies and the Zero Lower Bound," NBER Working Papers 17543, National Bureau of Economic Research, Inc.
  3. Pablo A. Guerron-Quintana, 2012. "Risk and uncertainty," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 9-18.
  4. Benjamin Born & Johannes Pfeifer, 2011. "Policy Risk and the Business Cycle," Bonn Econ Discussion Papers bgse06_2011, University of Bonn, Germany.
  5. Hafedh Bouakez & Foued Chihi & Michel Normandin, 2011. "Fiscal Policy and External Adjustment: New Evidence," Cahiers de recherche 1123, CIRPEE.
  6. Taisuke Nakata, 2013. "Uncertainty at the zero lower bound," Finance and Economics Discussion Series 2013-09, Board of Governors of the Federal Reserve System (U.S.).
  7. Dewachter, Hans & Wouters, Raf, 2012. "Endogenous risk in a DSGE model with capital-constrained financial intermediaries," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/396280, Katholieke Universiteit Leuven.
  8. Michael Plante & Nora Traum, 2012. "Time-Varying Oil Price Volatility and Macroeconomic Aggregates," Caepr Working Papers 2012-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  9. Scheffel, Eric Michael, 2012. "Political uncertainty in a data-rich environment," MPRA Paper 37318, University Library of Munich, Germany.
  10. Sylvain Leduc & Zheng Liu, 2012. "Uncertainty shocks are aggregate demand shocks," Working Paper Series 2012-10, Federal Reserve Bank of San Francisco.

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