When are the Effects of Fiscal Policy Uncertainty Large?

Benjamin K. Johannsen
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Benjamin K. Johannsen: https://www.federalreserve.gov/econres/benjamin-k-johannsen.htm

No 2014-40, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using a new-Keynesian model with endogenous capital accumulation, I show that uncertainty about fiscal policy can cause large declines in consumption, investment, and output when the zero lower bound (ZLB) binds, but has modest effects when the monetary authority is not constrained by the ZLB. I study uncertainty about the level of government spending and uncertainty about tax rates on consumption, wages, capital income, and investment. In my model, uncertainty about government spending and the wage tax rate has particularly large effects. I show that the effects of fiscal policy uncertainty are largest when the nominal interest rate is on the cusp of the ZLB and also that delaying fiscal policy uncertainty diminishes its effects only if the resolution of uncertainty occurs after ZLB no longer binds.

Keywords: Fiscal policy; zero lower bound; uncertainty (search for similar items in EconPapers)
Pages: 49 pages
Date: 2014-05-22
New Economics Papers: this item is included in nep-mac and nep-pbe
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Citations: View citations in EconPapers (10)

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