The Market Price of Fiscal Uncertainty

41 Pages Posted: 1 Nov 2011 Last revised: 10 Mar 2017

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 31, 2011

Abstract

Recent fiscal interventions have raised concerns about US public debt, future distortionary tax pressure and long-run growth potential. We explore the long-run implications of public financing policies aimed at short-run stabilization when: (i) agents are sensitive to model uncertainty as in Hansen and Sargent (2007), and (ii) growth is endogenous as in Romer (1990). We find that tax-smoothing policies promoting short-run stabilization generate a trade-off by simultaneously reducing the price of model uncertainty and significantly increasing the amount of long-run risk. Ultimately these tax policies depress innovation and long-run growth and may produce welfare losses.

Keywords: Robustness, Endogenous Growth, Asset Prices

Suggested Citation

Croce, Mariano Massimiliano and Nguyen, Thien Tung and Schmid, Lukas, The Market Price of Fiscal Uncertainty (October 31, 2011). Carnegie-Rochester Conference Series on Public Policy, JME 2012, Available at SSRN: https://ssrn.com/abstract=1952178 or http://dx.doi.org/10.2139/ssrn.1952178

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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