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Fiscal Volatility Shocks and Economic Activity

Jesus Fernandez-Villaverde (), Pablo Guerron, Keith Kuester and Juan F Rubio-Ramirez ()

No 8528, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fiscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, we first estimate tax and spending processes for the U.S. that allow for time-varying volatility. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate.

Keywords: DSGE models; fiscal policy; monetary policy; uncertainty (search for similar items in EconPapers)
JEL-codes: C11 E10 E30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba
Date: 2011-08
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Related works:
Journal Article: Fiscal Volatility Shocks and Economic Activity (2015) Downloads
Working Paper: Fiscal volatility shocks and economic activity (2012) Downloads
Working Paper: Fiscal Volatility Shocks and Economic Activity (2011) Downloads
Working Paper: Fiscal Volatility Shocks and Economic Activity (2011) Downloads
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