Fiscal Policy and the Distribution of Consumption Risk
Mariano Massimiliano Croce
University of North Carolina Kenan-Flagler Business School
Thien Tung Nguyen
University of Pennsylvania - The Wharton School
Duke University - The Fuqua School of Business
May 12, 2013
Recent fiscal interventions have raised concerns about U.S. public debt, future fiscal pressure, and long-run economic growth. This paper studies fiscal policy design in an economy in which (i) the household is averse to both short- and long-run uncertainty, and (ii) growth is endogenously sustained through innovations whose market value depends on the tax system. By reallocating tax distortions through debt, fiscal policy alters both the composition of intertemporal consumption risk and the incentives to innovate. Tax policies aimed at short-run stabilization may substantially increase long-run tax and growth uncertainty and ultimately reduce both average growth and welfare.
Number of Pages in PDF File: 47
Keywords: Fiscal Policy, Endogenous Growth, Recursive Preferences, Welfare Costs
JEL Classification: E62, G1, H2, H3working papers series
Date posted: June 29, 2011 ; Last revised: May 13, 2013
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