Fiscal Policy and the Distribution of Consumption Risk
49 Pages Posted: 29 Jun 2011 Last revised: 18 Oct 2013
Date Written: October 18, 2013
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: Suggested Citation