Fiscal Volatility Shocks and Economic Activity

Jesús Fernández-Villaverde, Pablo Guerron-Quintana, Keith Kuester, Juan Francisco Rubio-Ramirez
2011 Social Science Research Network  
We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. First, we estimate tax and spending processes for the U.S. that allow for timevarying volatility. We uncover strong evidence of the importance of this time-varying volatility in accounting for the dynamics of tax and spending data. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks
more » ... an have a sizable adverse effect on economic activity and inflation. An endogenous increase in markups accounts for about half of these.
doi:10.2139/ssrn.1908676 fatcat:uzj4326v5rfjdnlnm7k5c3vdca