Fiscal Policy and the Distribution of Consumption Risk

Posted: 29 Jun 2011 Last revised: 19 Nov 2018

See all articles by Mariano (Max) Massimiliano Croce

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Thien Tung Nguyen

Ohio State University (OSU) - Department of Finance

Lukas Schmid

University of Southern California - Marshall School of Business

Date Written: October 18, 2013

Abstract

This paper studies fiscal policy design in an economy in which (i) the representative household has recursive preferences, 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 risks and reduce both average growth and welfare. In contrast, policies oriented toward long-run stabilization increase growth, wealth and welfare by lowering the slope of the term structure of equity yields.

Keywords: Fiscal Policy, Endogenous Growth, Recursive Preferences, Welfare Costs

JEL Classification: E62, G1, H2, H3

Suggested Citation

Croce, Mariano Massimiliano and Nguyen, Thien Tung and Schmid, Lukas, Fiscal Policy and the Distribution of Consumption Risk (October 18, 2013). Available at SSRN: https://ssrn.com/abstract=1874003 or http://dx.doi.org/10.2139/ssrn.1874003

Mariano Massimiliano Croce (Contact Author)

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Thien Tung Nguyen

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Lukas Schmid

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

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