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Fiscal volatility shocks and economic activity

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

No 11-32, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The authors 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, the authors first estimate tax and spending processes for the U.S. that allow for time-varying volatility. They then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. The authors 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: Monetary policy; Fiscal policy; Uncertainty (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba and nep-mac
Date: 2011, Revised 2012-01-05
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Related works:
Journal Article: Fiscal Volatility Shocks and Economic Activity (2015) Downloads
Working Paper: Fiscal Volatility Shocks and Economic Activity (2011) 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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