The welfare and distributional effects of fiscal volatility: A quantitative evaluation

Bachmann, Rüdiger; Bai, Jinhui; Lee, Min Joon; Zhang, Fudong

doi:10.1016/j.red.2020.04.001

Cited by 9 publications

(5 citation statements)

References 75 publications

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“…I introduce limited capital market participation and show that household heterogeneity has important implications for aggregate outcomes. Bachmann et al (2015) and Bretscher et al (2017) also study the interaction of household heterogeneity and fiscal uncertainty. Their focuses are different from those in this paper.…”

Section: Relation To the Literaturementioning

confidence: 99%

“…Their focuses are different from those in this paper. In Bachmann et al (2015), they use an incomplete-market real business cycle model a lá Krusell and Smith (1998) to study the welfare and distributional consequences of permanently eliminating fiscal uncertainty. Bretscher et al (2017) estimate a New Keynesian model with a savers-spenders type heterogeneity to analyze the implications of fiscal uncertainty shocks on the term structure of interest rates and bond risk premia.…”

Section: Relation To the Literaturementioning

confidence: 99%

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Redistribution and Fiscal Uncertainty Shocks

Saijo

2020

Int Economic Review

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This paper studies the macroeconomic impact of an uncertainty shock about fiscal policy in a dynamic general equilibrium framework. Motivated by the observation that many fiscal policies are redistributive and that a sizable fraction of U.S. households do not own capital, I introduce household heterogeneity in the form of limited capital market participation. I show that household heterogeneity significantly magnifies the aggregate effect and induces co-movement of macroeconomic variables in a contraction that is generated by a fiscal uncertainty shock. This is because the limited capital market participation model captures individual uncertainty about redistribution that is absent in representative agent models. When agents are ambiguity averse, this uncertainty about redistribution has first-order effects because it shows up as heterogeneous worst-case scenarios. As a result, the model matches the empirical responses of macro variables to fiscal uncertainty shocks better than the representative agent counterpart.

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Section: Relation To the Literaturementioning

confidence: 99%

Section: Relation To the Literaturementioning

confidence: 99%

Redistribution and Fiscal Uncertainty Shocks

Saijo

2020

Int Economic Review

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“…They allow aggregate uncertainty to arise from both productivity and government purchase shocks. The present paper also studies the welfare effects of uncertainty but it differs from Xu (2017) and Bachmann et al (2018) by focusing on the uncertainty about monetary policy and its interaction with shifting trend inflation. This study's focus on the interactions of uncertainty and shifting trend inflation can help us to successfully model the US economy as argued by Fernandez-Villaverde et al (2015).…”

Section: S O U R C Ementioning

confidence: 99%

“…Few papers exploit the welfare analysis, but they only consider a one-sided movement of volatility (a decrease in the certain level of volatility of level shocks to zero), for example Lester, Pries, and Sims (2014) and Cho, Cooley, and Kim (2015). The recent work by Xu (2017) and Bachmann, Bai, Lee, and Zhang (2018) examines the welfare consequences of time-varying volatility. Research by Nakata (2014) and Ha, Thanh, and Thang (2019) also 1 Born and Pfeifer (2014) argue that the US data have been plagued by high shock volatilities since the 1970s.…”

Section: Introductionmentioning

confidence: 99%

Welfare costs of monetary policy uncertainty in the economy with shifting trend inflation

Thanh

Thang

2020

Scottish J Political Eco

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We study welfare costs of the uncertainty about monetary policy in the economy featuring shifting trend inflation. We follow Ruge-Murcia (J Econ Dyn Control 36: 914-938, 2012) to employ the SMM approach to fit the model to the US data (1979Q1-2015Q1). We find that the monetary policy uncertainty affects economic welfare through different dimensions. On the one hand, the policy uncertainty itself distorts the economic welfare negligibly, not only by increasing volatilities of consumption and leisure, but also by decreasing their average levels. A higher level of trend inflation then signifies these changes to produce greater welfare costs. Furthermore, the adverse impacts of policy uncertainty on the economy, documented by the impulse response functions of macroeconomic variables to policy uncertainty shock, become larger when central banks raise their inflation targets. On the other hand, the costs of exogenous variations in trend inflation are larger if there is policy uncertainty.

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“…I introduce limited capital market participation and show that household heterogeneity has important implications for aggregate outcomes. To the best of my knowledge, Bachmann et al (2015) is the only paper that studies the interaction of household heterogeneity and fiscal uncertainty. Their focus is different from that in this paper.…”

Section: Relation To the Literaturementioning

confidence: 99%

Redistribution and Fiscal Uncertainty Shocks

Saijo

2018

SSRN Journal

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This paper revisits the macroeconomic impact of an uncertainty shock about fiscal policy in a New Keynesian framework. Motivated by the observation that many fiscal policies are redistributive and that many U.S. households do not own capital, I introduce household heterogeneity in the form of limited capital market participation. I show that household heterogeneity significantly magnifies the aggregate effect and restores co-movement of macroeconomic variables in a contraction that is generated by a fiscal uncertainty shock. This is because the heterogeneous household model captures individual uncertainty about redistribution that cancels out in representative agent models. Importantly, the impact of fiscal uncertainty shocks becomes larger as wealth becomes more concentrated.

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The welfare and distributional effects of fiscal volatility: A quantitative evaluation

Cited by 9 publications

References 75 publications

Redistribution and Fiscal Uncertainty Shocks

Redistribution and Fiscal Uncertainty Shocks

Welfare costs of monetary policy uncertainty in the economy with shifting trend inflation

Redistribution and Fiscal Uncertainty Shocks

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