Fiscal Policy and the Distribution of Consumption Risk

49 Pages Posted: 29 Jun 2011 Last revised: 18 Oct 2013

Mariano Massimiliano Croce

University of North Carolina Kenan-Flagler Business School

Thien Tung Nguyen

Ohio State University (OSU) - Department of Finance

Lukas Schmid

Duke University - The Fuqua 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)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Builiding
Chapel Hill, NC North Carolina 27599-3490
United States

HOME PAGE: http://dl.dropboxusercontent.com/u/17690403/mmc_site/public_html/index.htm

Thien Tung Nguyen

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

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Lukas Schmid

Duke University - The Fuqua School of Business ( email )

Durham, NC 27708-0120
United States

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