Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty

Alan Auerbach and Kevin Hassett

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

Abstract: We construct a computational dynamic stochastic overlapping generations general equilibrium model with uncertain lifetimes and explore the impact of policy stickiness (specifically, a major reform will preclude future reforms for a generation) on optimal long-run fiscal policy. Under such circumstances, entitlement reforms exhaust a valuable option to move in the future. We explore the conditions under which the gain to waiting is large enough to induce optimizing policymakers to delay reforming a suboptimal system. We also allow for the uncertainty to have ARCH characteristics and explore the impact of time-varying uncertainty on the optimality of delayed policy action.

Date: 2002-08-01
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Related works:
Journal Article: Optimal long-run fiscal policy: Constraints, preferences and the resolution of uncertainty (2007)
Working Paper: Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty (2002)
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