Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty

Alan Auerbach and Kevin Hassett

No 9132, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We construct a computational dynamic stochastic overlapping generations general equilibrium model with uncertain lifetimes and explore the impact of policy stickiness (specifically, a major reform will preclude future reforms for a generation) on optimal long-run fiscal policy. Under such circumstances, entitlement reforms exhaust a valuable option to move in the future. We explore the conditions under which the gain to waiting is large enough to induce optimizing policymakers to delay reforming a suboptimal system. We also allow for the uncertainty to have ARCH characteristics and explore the impact of time-varying uncertainty on the optimality of delayed policy action.

JEL-codes: E62 H62 (search for similar items in EconPapers)
Date: 2002-08
Note: EFG PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Auerbach, Alan J. & Hassett, Kevin, 2007. "Optimal long-run fiscal policy: Constraints, preferences and the resolution of uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1451-1472, May.

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Journal Article: Optimal long-run fiscal policy: Constraints, preferences and the resolution of uncertainty (2007)
Working Paper: Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty (2002)
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