The Market Price of Fiscal Uncertainty
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Finance Papers
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Finance
Finance and Financial Management
Finance and Financial Management
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Croce, Mariano M
Nguyen, Thien Tung
Schmid, Lukas
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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.
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2012-07-01
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Journal of Monetary Economics