Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty

39 Pages Posted: 30 Aug 2002

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Kevin A. Hassett

American Enterprise Institute (AEI)

Date Written: August 2002

Abstract

We construct a computational dynamic stochastic overlapping generations general equilibrium model with uncertain lifetimes and explore the impact of policy stickiness (specifically, a major reform will preclude future reforms for a generation) on optimal long-run fiscal policy. Under such circumstances, entitlement reforms exhaust a valuable option to move in the future. We explore the conditions under which the gain to waiting is large enough to induce optimizing policymakers to delay reforming a suboptimal system. We also allow for the uncertainty to have ARCH characteristics and explore the impact of time-varying uncertainty on the optimality of delayed policy action.

Suggested Citation

Auerbach, Alan Jeffrey and Hassett, Kevin A., Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty (August 2002). NBER Working Paper No. w9132. Available at SSRN: https://ssrn.com/abstract=327158

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Kevin A. Hassett

American Enterprise Institute (AEI) ( email )

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United States
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202.862.7177 (Fax)

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