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The market price of fiscal uncertainty

  • Croce, Mariano M.
  • Nguyen, Thien T.
  • Schmid, Lukas
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    Recent fiscal interventions have raised concerns about US public debt, future distortionary tax pressure, and long-run growth potential. We explore the long-run implications of public financing policies aimed at short-run stabilization when: (i) agents are sensitive to model uncertainty, as in Hansen and Sargent (2007), and (ii) growth is endogenous, as in Romer (1990). We find that countercyclical deficit policies promoting short-run stabilization reduce the price of model uncertainty at the cost of significantly increasing the amount of long-run risk. Ultimately these tax policies depress innovation and long-run growth and may produce welfare losses.

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    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 59 (2012)
    Issue (Month): 5 ()
    Pages: 401-416

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    Handle: RePEc:eee:moneco:v:59:y:2012:i:5:p:401-416
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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    1. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
    2. Eric M. Leeper & Michael Plante & Nora Traum, 2009. "Dynamics Of Fiscal Financing In The United States," Caepr Working Papers 2009-012, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
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    7. Pástor, Luboš & Veronesi, Pietro, 2011. "Political Uncertainty and Risk Premia," CEPR Discussion Papers 8601, C.E.P.R. Discussion Papers.
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    9. Barillas, Francisco & Hansen, Lars Peter & Sargent, Thomas J., 2009. "Doubts or variability?," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2388-2418, November.
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    11. Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2010. ""Unfunded liabilities" and uncertain fiscal financing," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 600-619, July.
    12. Ludvigson, Sydney, 1996. "The macroeconomic effects of government debt in a stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 25-45, August.
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    16. Lars Peter Hansen & Thomas J. Sargent, 2007. "Introduction to Robustness," Introductory Chapters, Princeton University Press.
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