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

Ruediger Bachmann, Jinhui Bai, Minjoon Lee and Fudong Zhang

Review of Economic Dynamics, 2020, vol. 38, 127-153

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 calibrate our mod el 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. (Copyright: Elsevier)

Keywords: Fiscal volatility; Welfare costs; Distributional effects; Labor income risk; Wealth inequality; Transition path (search for similar items in EconPapers)
JEL-codes: E30 E32 E60 E62 H30 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (9)

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Working Paper: The Welfare and Distributional Effects of Fiscal Volatility: A Quantitative Evaluation (2020)
Working Paper: The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation (2017)
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DOI: 10.1016/j.red.2020.04.001

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