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Fiscal Policy and Uncertainty


  • Auerbach, Alan J
  • Hassett, Kevin A


Government fiscal aggregates are often manipulated over the course of the business cycle in order to provide counter-cyclical stimulus. Changes that are not discretionary--the so-called "built-in stabilizers"--also significantly vary over the business cycle, in a manner that is even more predictable than the periodic discretionary measures. Such measures introduce important bi-directional interactions between policy and uncertainty. On the one hand, activist policy may heighten the general level of uncertainty in the economy, by adding policy ambiguity to the more fundamental sources of uncertainty. On the other hand, the design of optimal policy itself depends crucially on levels of uncertainty concerning the state of the economy in the short and long run. In this paper we review recent work that explores the impact of uncertainty on optimal policy design, proceeding from the short to the long run. Copyright 2002 by Blackwell Publishers Ltd.

Suggested Citation

  • Auerbach, Alan J & Hassett, Kevin A, 2002. "Fiscal Policy and Uncertainty," International Finance, Wiley Blackwell, vol. 5(2), pages 229-249, Summer.
  • Handle: RePEc:bla:intfin:v:5:y:2002:i:2:p:229-49

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    References listed on IDEAS

    1. Jan J.G. Lemmen & Charles A.E. Goodhart, 1999. "Credit Risks and European Government Bond Markets: A Panel Data Econometric Analysis," Eastern Economic Journal, Eastern Economic Association, vol. 25(1), pages 77-107, Winter.
    2. Giovannini, Alberto & Piga, Gustavo, 1992. "Understanding the High Interest Rates on Italian Government Securities," CEPR Discussion Papers 720, C.E.P.R. Discussion Papers.
    3. Favero, Carlo A & Giavazzi, Francesco & Spaventa, Luigi, 1997. "High Yields: The Spread on German Interest Rates," Economic Journal, Royal Economic Society, vol. 107(443), pages 956-985, July.
    4. Toni Gravelle, 1999. "Liquidity of the Government of Canada Securities Market: Stylised Facts and Some Market Microstructure Comparisons to the United States Treasury Market," CGFS Papers chapters,in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-37 Bank for International Settlements.
    5. Jan J.G. Lemmen, 1999. "Managing Government Default Risk in Federal States," FMG Special Papers sp116, Financial Markets Group.
    6. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
    7. Ivo Arnold, 1999. "The third leg of the stool: Financial stability as a prerequisite for EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(2), pages 280-305, June.
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    Cited by:

    1. Giovanni Di Bartolomeo & Francesco Giuli & Marco Manzo, 2009. "Policy uncertainty, symbiosis, and the optimal fiscal and monetary conservativeness," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 36(4), pages 461-474, November.
    2. Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2012. "The Excess Burden of Government Indecision," Tax Policy and the Economy, University of Chicago Press, vol. 26(1), pages 125-164.
    3. Giovanni Di Bartolomeo & Marco Manzo, 2010. "Fiscal Policy Under Balanced Budget And Indeterminacy: A New Keynesian Perspective," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(4), pages 455-472, September.
    4. KITAO Sagiri, 2016. "Policy Uncertainty and the Cost of Delaying Reform: A case of aging Japan," Discussion papers 16013, Research Institute of Economy, Trade and Industry (RIETI).
    5. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, vol. 96(3), pages 279-294.
    6. Torben Andersen, 2014. "Intergenerational redistribution and risk sharing with changing longevity," Journal of Economics, Springer, vol. 111(1), pages 1-27, February.
    7. Torben Andersen, 2005. "Social Security and Longevity," CESifo Working Paper Series 1577, CESifo Group Munich.
    8. Dolls, Mathias & Fuest, Clemens & Kock, Jan & Peichl, Andreas & Wehrhöfer, Nils & Wittneben, Christian, 2014. "Abschlussbericht zu Forschungsvorhaben fe 5/14: "Automatic stabilizers in the Eurozone: Analysis of their effectiveness at the member state and euro area level and in international comparison&quo," ZEW Expertises, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research, number 111444.
    9. Carine Bouthevillain & John Caruana & Cristina Checherita & Jorge Cunha & Esther Gordo & Stephan Haroutunian & Geert Langenus & Amela Hubic & Bernhard Manzke & Javier J. Pérez & Pietro Tommasino, 2009. "Pros and cons of various fiscal measures to stimulate the economy," Economic Bulletin, Banco de España;Economic Bulletin Homepage, issue JUL, July.
    10. Torben Andersen, 2006. "Increasing Longevity and Social Security Reforms," CESifo Working Paper Series 1789, CESifo Group Munich.
    11. Zheng, Liping & Severe, Sean, 2016. "Teaching the macroeconomic effects of tax cuts with a quasi-experiment," Economic Analysis and Policy, Elsevier, vol. 51(C), pages 55-65.
    12. Gourio, François, 2011. "Putty-clay technology and stock market volatility," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 117-131, March.

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