Fiscal Policy in the US: A New Measure of Uncertainty and Its Recent Development

30 Pages Posted: 31 Jul 2019

Date Written: November 6, 2018

Abstract

We use the dispersion of the Federal Budget Balance forecasts from Consensus Economics to produce a new measure of fiscal uncertainty; constant horizon forecasts are obtained through mixture distributions. The scheme we propose has several advantages over previous uncertainty measures. First (as opposed to recent proposals) it results in a forward-looking measure, which implies that any sudden development in (un)expected fiscal stance is immediately incorporated in the series. Second, the measure is by construction a real-time one. Third, being completely model-free it is not contaminated (inflated) by model uncertainty. Fourth, it is comprehensive in accounting both for the critical welfare component of public expenditures and for taxes, i.e. it does not simply track uncertainty stemming from public consumption and investment. Fifth, as opposed to uncertainty indexes which can be interpreted only dynamically, our measure has an obvious intuitive point-wise interpretation. Interestingly, the inception of the Trump administration has led to unprecedented uncertainty shocks which are shown to have put a non-negligible brake on the US slow recovery. On a more general level, we show that fiscal uncertainty shocks have clear recessionary effects. Furthermore, constraints on monetary policies during the ZLB have likely caused the recessionary effects of fiscal uncertainty shocks to be stronger.

Keywords: VAR, fiscal policy, uncertainty shocks

JEL Classification: C2, E3, O41

Suggested Citation

Anzuini, Alessio and Rossi, Luca, Fiscal Policy in the US: A New Measure of Uncertainty and Its Recent Development (November 6, 2018). Bank of Italy Temi di Discussione (Working Paper) No. 1197, Available at SSRN: https://ssrn.com/abstract=3429141 or http://dx.doi.org/10.2139/ssrn.3429141

Alessio Anzuini (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Luca Rossi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
10
Abstract Views
225
PlumX Metrics