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Fiscal policy uncertainty and US output

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  • Popiel Michal Ksawery

    (Analysis Group Inc, Montreal, Quebec, Canada)

Abstract

The rise in US partisan conflict following the Great Recession led to a popular belief that uncertainty about fiscal policy was impeding output growth. I explore this hypothesis by nesting it in a standard structural vector autoregression (SVAR) model traditionally used for estimating fiscal multipliers. I augment the model with stochastic volatility (a measure of uncertainty) and allow that to interact with the endogenous variables. I consider various trend assumptions, subsamples and information sets and find that the evidence does not support this hypothesis. The results reveal that there is no systematic relationship between fiscal policy uncertainty and output. Moreover, a time-varying parameter version of the model shows that the lack of consistency across specifications is not driven by changes in the transmission of uncertainty shocks over time. Finally, I revisit Fernández-Villaverde, Guerrón-Quintana, Kuester, and Rubio-Ramírez (Fernández-Villaverde, J., P. Guerrón-Quintana, K. Kuester, and J. Rubio-Ramírez. 2015. “Fiscal Volatility Shocks and Economic Activity.” American Economic Review 105: 3352–3384) who find a significant negative relationship between fiscal policy uncertainty and output. I show that when their estimation is modified to incorporate the uncertainty around the estimate of uncertainty, their empirical result falls in line with the findings in this paper.

Suggested Citation

  • Popiel Michal Ksawery, 2020. "Fiscal policy uncertainty and US output," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(2), pages 1-26, April.
    • Handle: RePEc:bpj:sndecm:v:24:y:2020:i:2:p:26:n:5
    DOI: 10.1515/snde-2018-0024
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    References listed on IDEAS

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    Cited by:

    1. David Berger & Ian Dew-Becker & Stefano Giglio, 2020. "Uncertainty Shocks as Second-Moment News Shocks," Review of Economic Studies, Oxford University Press, vol. 87(1), pages 40-76.

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