Welfare and Bond Pricing Implications of Fiscal Stabilization Policies

50 Pages Posted: 20 Dec 2013

See all articles by Kai Philipp Christoffel

Kai Philipp Christoffel

European Central Bank (ECB)

Ivan Jaccard

European Central Bank (ECB) - Directorate General Research

Juha Kilponen

Bank of Finland - Research

Date Written: December 11, 2013

Abstract

How do cyclical fiscal stabilisation policies affect welfare and government bond risk premia? Using a new Keynesian model we find that the effects of fiscal policy rules on the bond premium and welfare crucially depend on the source of business cycle fluctuations. The overall effect is estimated using Bayesian methods and the mechanism is deconstructed by examining the propagation mechanism of the different shocks. We find that the impact of fiscal policy cyclicality on welfare and risk premia is highly non-linear and that these effects are of a policy relevant magnitude. Finally, we find that the welfare cost of highly procyclical fiscal policies are very large, but also excessive fiscal stabilization can generate non-negligible welfare losses.

Keywords: New Keynesian models, fiscal policy, bond risk premium, monetary policy

JEL Classification: E32, E52, E62, G12

Suggested Citation

Christoffel, Kai Philipp and Jaccard, Ivan and Kilponen, Juha, Welfare and Bond Pricing Implications of Fiscal Stabilization Policies (December 11, 2013). Bank of Finland Research Discussion Paper No. 32/2013. Available at SSRN: https://ssrn.com/abstract=2369350 or http://dx.doi.org/10.2139/ssrn.2369350

Kai Philipp Christoffel

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ivan Jaccard

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

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