Uncertainty and fiscal cliffs

Troy Davig and Andrew Foerster

No RWP 14-4, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: Motivated by the US Fiscal Cliff in 2012, this paper considers the short- and longer- term impact of uncertainty generated by fiscal policy. Empirical evidence shows increases in economic policy uncertainty lower investment and employment. Investment that is longer-lived and subject to a longer planning horizon responds to policy uncertainty with a lag, while capital that depreciates more quickly and can be installed with few costs falls immediately. A DSGE model incorporating uncertainty over future tax regimes produces responses to fiscal uncertainty that match key features of the data. The model features uncertainty over the average tax rate and rational expectations about the resolution of uncertainty with specific outcomes and timing. Uncertainty injects noise into the economy and lowers the level of economic activity.

Keywords: Fiscal policy; Uncertainty; Distorting taxation (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-04-01
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
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Citations: View citations in EconPapers (14)

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https://www.kansascityfed.org/documents/640/pdf-rwp14-04.pdf (application/pdf)

Related works:
Journal Article: Uncertainty and Fiscal Cliffs (2019)
Working Paper: Uncertainty and Fiscal Cliffs (2018)
Working Paper: Uncertainty and Fiscal Cliffs (2015)
Working Paper: Uncertainty and Fiscal Cliffs (2014)
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