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How Does Uncertainty about Future Fiscal Policy Affect Current Macroeconomic Variables?

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  • Rankin, Neil

Abstract

A dynamic stochastic general equilibrium macromodel is constructed, based on infinitely lived, dynamically optimizing households with labor market monopoly power. Randomness in future government spending causes randomness in the future output and price levels, both when the money wage is flexible and when it is set one period in advance. The author shows that, through three different mechanisms, rational anticipation of this depresses current aggregate demand. If the wage is preset, it thereby also depresses current output. Such fiscal uncertainty is suggested as one possible explanation for the faltering of the economic recovery in Europe in 1995 and 1996. Copyright 1998 by The editors of the Scandinavian Journal of Economics.

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  • Rankin, Neil, 1998. " How Does Uncertainty about Future Fiscal Policy Affect Current Macroeconomic Variables?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(2), pages 473-494, June.
  • Handle: RePEc:bla:scandj:v:100:y:1998:i:2:p:473-94
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    Cited by:

    1. Francesco Sergi, 2015. "L'histoire (faussement) naïve des modèles DSGE," Documents de travail du Centre d'Economie de la Sorbonne 15066, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    2. Ramiro Rodríguez Revilla, 2011. "Modelos de equilibrio general dinámicos y estocásticos para Colombia 1995-2011," REVISTA ECOS DE ECONOMÍA, UNIVERSIDAD EAFIT, December.
    3. Brian Piper, 2014. "Factor-Specific Productivity," Working Papers 1401, Sam Houston State University, Department of Economics and International Business.
    4. Francesco Sergi, 2015. "L'histoire (faussement) naïve des modèles DSGE," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01222798, HAL.

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