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The market price of fiscal uncertainty

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  • Croce, Mariano M.
  • Nguyen, Thien T.
  • Schmid, Lukas

Abstract

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.

Suggested Citation

  • Croce, Mariano M. & Nguyen, Thien T. & Schmid, Lukas, 2012. "The market price of fiscal uncertainty," Journal of Monetary Economics, Elsevier, vol. 59(5), pages 401-416.
    • Handle: RePEc:eee:moneco:v:59:y:2012:i:5:p:401-416
    DOI: 10.1016/j.jmoneco.2012.04.004
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    References listed on IDEAS

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