The Welfare Costs of Fiscal Uncertainty: a Quantitative Evaluation

Minjoon Lee, Jinhui Bai, Fudong Zhang and Ruediger Bachmann
Additional contact information
Fudong Zhang: University of Michigan

No 744, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: This paper quantifies the distributional costs of fiscal uncertainty in a neoclassical stochastic growth environment. We set up an incomplete-market model where heterogeneous households face uninsurable idiosyncratic risks in the processes of labor income and discount factor. Aggregate uncertainty arises from both productivity and fiscal spending shocks. Starting from an initial situation calibrated to U.S. wealth inequality and aggregate as well as idiosyncratic shocks, we evaluate the general equilibrium consequences of eliminating fiscal spending shocks, while keeping the aggregate productivity process intact. We conduct comparisons along the transition path, and present the distributional consequences of eliminating fiscal uncertainty across wealth, employment status, and preference dimensions. The extensions to the baseline analysis include the investigation of alternative roles of government spending, an evaluation of welfare consequences under balanced budget fiscal rule, and an analysis of the sudden policy change and extreme fiscal uncertainty.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (2)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:744

Access Statistics for this paper

More papers in 2014 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().