The market price of fiscal uncertainty

Published

Journal Article

Recent fiscal interventions have raised concerns about US public debt, future distortionary tax pressure, and long-run growth potential. We explore the long-run implications of public financing policies aimed at short-run stabilization when: (i) agents are sensitive to model uncertainty, as in Hansen and Sargent (2007), and (ii) growth is endogenous, as in Romer (1990). We find that countercyclical deficit policies promoting short-run stabilization reduce the price of model uncertainty at the cost of significantly increasing the amount of long-run risk. Ultimately these tax policies depress innovation and long-run growth and may produce welfare losses. © 2012 Elsevier B.V.

Full Text

Duke Authors

Cited Authors

  • Croce, MM; Nguyen, TT; Schmid, L

Published Date

  • July 1, 2012

Published In

Volume / Issue

  • 59 / 5

Start / End Page

  • 401 - 416

International Standard Serial Number (ISSN)

  • 0304-3932

Digital Object Identifier (DOI)

  • 10.1016/j.jmoneco.2012.04.004

Citation Source

  • Scopus