The Welfare and Distributional Effects of Fiscal Volatility: A Quantitative Evaluation

RÜdiger Bachman (), Jinhui Bai, Minjoon Lee and Fudong Zhang ()
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RÜdiger Bachman: University of Notre Dame
Fudong Zhang: University of Michigan
Authors registered in the RePEc Author Service: Ruediger Bachmann

No 2020-2, Working Papers from School of Economic Sciences, Washington State University

Abstract: This study explores the welfare and distributional effects of fiscal volatility using a neoclassical stochastic growth model with incomplete markets. In our model, households face uninsurable idiosyncratic risks in their labor income and discount factor processes, and we allow aggregate uncertainty to arise from both productivity and government purchases shocks. We calibrateour model to key features of the U.S. economy, before eliminating government purchases shocks. We then evaluate the distributional consequences of the elimination of fiscal volatility and find that, in our baseline case, welfare gains increase with private wealth holdings.

Keywords: fiscal volatility; welfare costs; distributional effects; labor income risk; wealthinequality; transition path (search for similar items in EconPapers)
JEL-codes: E30 E32 E60 E62 H30 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2020-03-14
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
Note: http://ses.wsu.edu/wp-content/uploads/2020/04/WP2020-2.pdf
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation (2020)
Working Paper: The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation (2017)
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