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The Welfare Costs of Fiscal Uncertainty: a Quantitative Evaluation

Author

Listed:
  • Minjoon Lee

    (University of Michigan)

  • Jinhui Bai

    (Georgetown University)

  • Fudong Zhang

    (University of Michigan)

  • Ruediger Bachmann

    (RWTH Aachen University)

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.

Suggested Citation

  • Minjoon Lee & Jinhui Bai & Fudong Zhang & Ruediger Bachmann, 2014. "The Welfare Costs of Fiscal Uncertainty: a Quantitative Evaluation," 2014 Meeting Papers 744, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:744
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    Cited by:

    1. Röhrs, Sigrid & Winter, Christoph, 2017. "Reducing government debt in the presence of inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 1-20.
    2. Gerald Carlino & Nicholas Zarra & Robert Inman & Thorsten Drautzburg, 2019. "Fiscal Policy in Monetary Unions: State Partisanship and its Macroeconomic Effects," 2019 Meeting Papers 434, Society for Economic Dynamics.
    3. Lorenzo Bretscher & Alex Hsu & Andrea Tamoni, 2017. "Level and Volatility Shocks to Fiscal Policy: Term Structure Implications," 2017 Meeting Papers 258, Society for Economic Dynamics.
    4. Levy, Antoine & Ricci, Luca Antonio & Werner, Alejandro, 2020. "The Sources of Fiscal Fluctuations," CEPR Discussion Papers 15450, C.E.P.R. Discussion Papers.
    5. Hikaru Saijo, 2018. "Redistribution and Fiscal Uncertainty Shocks," IMES Discussion Paper Series 18-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
    6. Laura E. Jackson & Christopher Otrok & Michael T. Owyang, 2019. "Tax Progressivity, Economic Booms, and Trickle-Up Economics," Working Papers 2019-034, Federal Reserve Bank of St. Louis, revised 06 Jun 2022.

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    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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