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The Welfare and Distributional Effects of Fiscal Volatility: A Quantitative Evaluation

Author

Listed:
  • RÜdiger Bachman

    (University of Notre Dame)

  • Jinhui Bai

    (Washington State University)

  • Minjoon Lee

    (Carleton University)

  • Fudong Zhang

    (University of Michigan)

Abstract

This study explores the welfare and distributional effects of fiscal volatility using a neoclassical stochastic growth model with incomplete markets. In our model, households face uninsurable idiosyncratic risks in their labor income and discount factor processes, and we allow aggregate uncertainty to arise from both productivity and government purchases shocks. We calibrateour model to key features of the U.S. economy, before eliminating government purchases shocks. We then evaluate the distributional consequences of the elimination of fiscal volatility and find that, in our baseline case, welfare gains increase with private wealth holdings.

Suggested Citation

  • RÜdiger Bachman & Jinhui Bai & Minjoon Lee & Fudong Zhang, 2020. "The Welfare and Distributional Effects of Fiscal Volatility: A Quantitative Evaluation," Working Papers 2020-2, School of Economic Sciences, Washington State University.
    • Handle: RePEc:ris:wsuwpa:2020_002
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    1. The Welfare and Distributional Effects of Fiscal Volatility: A Quantitative Evaluation
      by Christian Zimmermann in NEP-DGE blog on 2021-02-02 05:00:29

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    1. Hikaru Saijo, 2020. "Redistribution And Fiscal Uncertainty Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(3), pages 1073-1095, August.
    2. Kopiec, Paweł, 2024. "The aggregate and distributional effects of fiscal stimuli," Economic Modelling, Elsevier, vol. 134(C).
    3. Ding, Sai & Jiang, Wei & Li, Shengyu & Wei, Shang-Jin, 2024. "Fiscal policy volatility and capital misallocation: Evidence from China," European Economic Review, Elsevier, vol. 167(C).
    4. Gerald Carlino & Nicholas Zarra & Robert Inman & Thorsten Drautzburg, 2019. "Fiscal Policy in Monetary Unions: State Partisanship and its Macroeconomic Effects," 2019 Meeting Papers 434, Society for Economic Dynamics.
    5. Lorenzo Bretscher & Alex Hsu & Andrea Tamoni, 2017. "Level and Volatility Shocks to Fiscal Policy: Term Structure Implications," 2017 Meeting Papers 258, Society for Economic Dynamics.
    6. Röhrs, Sigrid & Winter, Christoph, 2017. "Reducing government debt in the presence of inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 1-20.
    7. Laura E. Jackson & Christopher Otrok & Michael T. Owyang, 2019. "Tax Progressivity, Economic Booms, and Trickle-Up Economics," Working Papers 2019-034, Federal Reserve Bank of St. Louis, revised 06 Jun 2022.
    8. Mukoyama, Toshihiko, 2023. "In defense of the Kaldor-Hicks criterion," Economics Letters, Elsevier, vol. 224(C).

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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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