Fiscal Volatility Shocks and Economic Activity

@inproceedings{FernndezVillaverde2015FiscalVS,
  title={Fiscal Volatility Shocks and Economic Activity},
  author={Jes{\'u}s Fern{\'a}ndez-Villaverde and Pablo A. Guerr{\'o}n-Quintana and Keith Kuester and Juan F. Rubio-Ramirez},
  year={2015}
}
We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. First, we estimate tax and spending processes for the U.S. that allow for timevarying volatility. We uncover strong evidence of the importance of this time-varying volatility in accounting for the dynamics of tax and spending data. We then feed these processes into an otherwise standard New Keynesian business cycle model fitted to the U.S. economy. We find that fiscal volatility shocks can… CONTINUE READING

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