Finance Papers

Document Type

Journal Article

Date of this Version

7-2012

Publication Source

Journal of Monetary Economics

Volume

59

Issue

5

Start Page

401

Last Page

416

DOI

10.1016/j.jmoneco.2012.04.004

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.

Copyright/Permission Statement

© 2012. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.

Embargo Date

7-2016

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Date Posted: 27 November 2017

This document has been peer reviewed.