Fiscal policy in the US: a new measure of uncertainty and its effects on the American economy
- PDF / 933,715 Bytes
- 22 Pages / 439.37 x 666.142 pts Page_size
- 52 Downloads / 225 Views
Fiscal policy in the US: a new measure of uncertainty and its effects on the American economy Alessio Anzuini1 · Luca Rossi1 Received: 27 January 2020 / Accepted: 6 November 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract We use the dispersion of the Federal Budget Balance forecasts from Consensus Economics to construct a new measure of fiscal uncertainty; constant horizon forecasts are obtained through mixture distributions. The scheme we propose has several advantages over previous uncertainty measures. First (as opposed to recent proposals), it results in a forward-looking measure, which implies that any sudden development in terms of an (un)expected fiscal stance is immediately incorporated in the series. Second, the measure is by construction a real-time one. Third, being completely model-free, it is not contaminated (inflated) by model uncertainty. Fourth, our measure does not simply track uncertainty stemming from public consumption and investment, whereas it is comprehensive in also accounting both for the critical welfare component of public expenditure and for taxes. Fifth, as opposed to uncertainty indexes which can be interpreted only dynamically, our measure has an obvious intuitive pointwise interpretation. Interestingly, the inception of the Trump administration has led to unprecedented uncertainty shocks which have demonstrably put a non-negligible brake on the slow US recovery. More generally, we show that fiscal uncertainty shocks have clear recessionary effects. Furthermore, constraints on monetary policies during the ZLB have likely strengthened the recessionary effects of fiscal uncertainty shocks. Keywords VAR · Fiscal policy · Uncertainty shocks · Professional forecasts JEL Classification C2 · E3 · O41
The opinions expressed herein are of the authors and do not necessarily reflect those of Banca d’Italia.
B
Luca Rossi [email protected] Alessio Anzuini [email protected]
1
Banca d’Italia, Via Nazionale 91, 00184 Rome, Italy
123
A. Anzuini, L. Rossi
1 Introduction Economic theory suggests that uncertainty shocks may be important in explaining economic fluctuations: firms may react to an increasingly uncertain environment by cutting back hiring and investment; financial intermediaries may become more reluctant to lend; households may increase their propensity to save.1 Economic uncertainty takes many forms and originates from several sources. In the current paper, we focus on fiscal policy uncertainty (FPU). Fiscal policy may represent a source of uncertainty for economic agents for several reasons. In countries with unsustainable public finances, households and firms may expect changes in future tax rates and/or expenditure programs (and therefore on crucial variables such as net profits, disposable income, etc.), but they may be unsure of the timing as well as of the magnitude of those changes.2 Even in countries where public finances are sustainable, FPU may be high if the political process is polarized and fiscal frameworks are weak
Data Loading...
