Uncertainty and the Design of Long-Run Fiscal Policy

Alan Auerbach and Kevin Hassett

No 7036, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper explores optimal fiscal policy in an overlapping-generations general-equilibrium model under uncertainty and the impact on optimal policy of the introduction of a type of policy stickiness intended to account for the stylized fact that major reforms happen infrequently. In general, our analysis suggests not only that action should not be delayed, but further that action should actually be accelerated. The added realism of restrictions on the frequency of policy changes alters this result in two ways. The prospect of being unable to set policy in the future occasions even more precautionary saving today, if the government acts. However, the government may also choose not to set policy, and its inaction range is very asymmetric. Because the impact of its policies on the current elderly cannot be reversed in the future, the government is much more likely to choose inaction when fiscal tightening is called for. Thus, the optimal policy response over time might best be characterized by great caution in general, but punctuated by occasional periods of apparent irresponsibility.

JEL-codes: E62 H62 (search for similar items in EconPapers)
Date: 1999-03
Note: PE EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published as Auerbach, A. J. and K. A. Hassett. "Fiscal Policy And Uncertainty," International Finance, 2002, v5(2,Summer), 229-249.
Published as Auerbach, A. and R. Lee (eds.)Demographic Change and Fiscal Policy. Cambridge: Cambridge University Press, 2008.

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