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American Economic Review Vol. 105 No. 11 2015

Fiscal Volatility Shocks and Economic Activity

Jesús Fernández-Villaverde1; Pablo Guerrón-Quintana2; Keith Kuester3; Juan Rubio-Ramírez4

1 Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104 (e-mail: ) · 2 Research Department, Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106 (e-mail: ) · 3 Department of Economics, University of Bonn, Institute for Macroeconomics and Econometrics, Adenauerallee 24-42, 53113 Bonn, Germany (e-mail: ) · 4 Department of Economics, Emory University, Rich Memorial Building, Room 306, Atlanta, GA 30322; Federal Reserve Bank of Atlanta; and BBVA Research (e-mail: )

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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.

DOI
10.1257/aer.20121236
Volume
105
Issue
11
Pages
3352-3384
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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