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Fiscal news and macroeconomic volatility

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  • Born, Benjamin
  • Peter, Alexandra
  • Pfeifer, Johannes

Abstract

This paper analyzes the contribution of anticipated capital and labor tax shocks to business cycle volatility in an estimated New Keynesian business cycle model. While fiscal policy accounts for about 15% of output variance at business cycle frequencies, this mostly derives from anticipated government spending shocks. Tax shocks, both anticipated and unanticipated, contribute little to the fluctuations of real variables. However, anticipated capital tax shocks do explain a sizable part of inflation fluctuations, accounting for up to 12% of its variance. In line with earlier studies, news shocks in total account for about 50% of output variance. Further decomposing this news effect, we find permanent total factor productivity news shocks to be most important. When looking at the federal level instead of total government, the importance of anticipated tax and spending shocks significantly increases, suggesting that fiscal policy at the subnational level typically counteracts the effects of federal fiscal policy shocks.

Suggested Citation

  • Born, Benjamin & Peter, Alexandra & Pfeifer, Johannes, 2013. "Fiscal news and macroeconomic volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2582-2601.
  • Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2582-2601
    DOI: 10.1016/j.jedc.2013.06.011
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    Cited by:

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    2. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.
    3. Troy Davig & Andrew Foerster, 2019. "Uncertainty and Fiscal Cliffs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(7), pages 1857-1887, October.
    4. Robert Dixon & Guay C. Lim, 2018. "Labor'S Share, The Firm'S Market Power, And Total Factor Productivity," Economic Inquiry, Western Economic Association International, vol. 56(4), pages 2058-2076, October.
    5. Ryan Chahrour & Kyle Jurado, 2018. "News or Noise? The Missing Link," American Economic Review, American Economic Association, vol. 108(7), pages 1702-1736, July.
    6. Born, Benjamin & Peter, Alexandra & Pfeifer, Johannes, 2013. "Fiscal news and macroeconomic volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2582-2601.
    7. Karel Mertens & José Luis Montiel Olea, 2018. "Marginal Tax Rates and Income: New Time Series Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 133(4), pages 1803-1884.
    8. Fève, Patrick & Kass-Hanna, Tannous & Pietrunti, Mario, 2016. "An analytical characterization of noisy fiscal policy," Economics Letters, Elsevier, vol. 148(C), pages 76-79.
    9. Rodriguez-Lopez, Jesus & Solis-Garcia, Mario, 2018. "Defense spending and fiscal multipliers: it's all in the variance," MPRA Paper 86911, University Library of Munich, Germany.
    10. Afrin, Sadia, 2020. "Does oligopolistic banking friction amplify small open economy's business cycles? Evidence from Australia," Economic Modelling, Elsevier, vol. 85(C), pages 119-138.
    11. Nancy Stokey, 2016. "Wait-and See: Investment Options under Policy Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 246-265, July.
    12. Johannes Hermanus Kemp & Hylton Hollander, 2020. "A medium-sized, open-economy, fiscal DSGE model of South Africa," WIDER Working Paper Series wp-2020-92, World Institute for Development Economic Research (UNU-WIDER).
    13. William Gatt, 2018. "Housing boom-bust cycles and asymmetric macroprudential policy," CBM Working Papers WP/02/2018, Central Bank of Malta.
    14. Michael Funke & Raphael Terasa, 2020. "Will Germany's Temporary VAT Tax Rates Cut as Part of the Covid-19 Fiscal Stimulus Package Boost Consumption and Growth?," CESifo Working Paper Series 8765, CESifo.
    15. Kazutaka Kurasawa, 2018. "Forecasting US recession with the economic policy uncertainty indexes of policy categories," Economics and Business Letters, Oviedo University Press, vol. 6(4), pages 100-109.
    16. Masahiro Tanaka, 2015. "Measuring Political Budget Cycles: A Bayesian Semiparametric Assessment," Working Papers 1415, Waseda University, Faculty of Political Science and Economics.
    17. Yasuo Hirose & Takushi Kurozumi, 2012. "Identifying News Shocks with Forecast Data," CAMA Working Papers 2012-01, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    18. Orlik, Anna & Veldkamp, Laura, 2014. "Understanding Uncertainty Shocks and the Role of Black Swans," CEPR Discussion Papers 10147, C.E.P.R. Discussion Papers.
    19. R. Dixon & G.C. Lim, 2017. "Labor's Share, the Firm's Market Power and TFP," Melbourne Institute Working Paper Series wp2017n22, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    20. Nancy L. Stokey, 2013. "Wait-and-See: Investment Options under Policy Uncertainty," NBER Working Papers 19630, National Bureau of Economic Research, Inc.
    21. Ng, Eric C.Y. & Feng, Ning, 2016. "Housing market dynamics in a small open economy: Do external and news shocks matter?," Journal of International Money and Finance, Elsevier, vol. 63(C), pages 64-88.

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    More about this item

    Keywords

    Anticipated tax shocks; Sources of aggregate fluctuations; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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