American Economic Review· 2015Q1
Fiscal Volatility Shocks and Economic Activity
- 935citations
- Q1SCImago
- 2015year
Short summary
Unexpected increases in fiscal policy uncertainty significantly reduce economic activity, driven by an endogenous increase in markups.
AI-generated from the title and abstract; the full text is not read.
Key points
- Unexpected changes in fiscal policy uncertainty negatively affect economic activity.
- Time-varying volatility in US tax and spending processes was estimated.
- An endogenous increase in markups is a key mechanism driving the adverse effects.
- Both VAR and New Keynesian model analyses confirm these findings.
AI-generated from the title and abstract; the full text is not read.
Abstract
We study how unexpected changes in uncertainty about fiscal policy affect economic activity. First, we estimate tax and spending processes for the United States with time-varying volatility to uncover evidence of time-varying volatility. Second, we estimate a VAR for the US economy using the time-varying volatility found in the previous step. Third, we feed the tax and spending processes into an otherwise standard New Keynesian model. Both in the VAR and in the model, we find that unexpected changes in fiscal volatility shocks can have a sizable adverse effect on economic activity. An endogenous increase in markups is a key mechanism. (JEL E12, E23, E32, E52, E62)
The authors' abstract, as published at the source. American Economic Review, 2015 · DOI ↗
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Field: General Economics, Econometrics and Finance
General Economics, Econometrics and FinanceEconomics, Econometrics and Finance