Fiscal Volatility Shocks and Economic Activity

53 Pages Posted: 11 Aug 2011

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Pablo Guerrón-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Keith Kuester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Multiple version iconThere are 3 versions of this paper

Date Written: August 9, 2011

Abstract

The authors study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fiscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, the authors first estimate tax and spending processes for the U.S. that allow for time-varying volatility. They then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. The authors find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate.

Keywords: DSGE models, Uncertainty, Fiscal Policy, Monetary Policy

JEL Classification: E10, E30, C11

Suggested Citation

Fernández-Villaverde, Jesús and Guerron-Quintana, Pablo and Kuester, Keith and Rubio-Ramirez, Juan Francisco, Fiscal Volatility Shocks and Economic Activity (August 9, 2011). FRB of Philadelphia Working Paper No. 11-32. Available at SSRN: https://ssrn.com/abstract=1908330 or http://dx.doi.org/10.2139/ssrn.1908330

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Pablo Guerron-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

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Keith Kuester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

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Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department ( email )

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HOME PAGE: http://www.econ.umn.edu/~rubio

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