Working Paper
Uncertainty and Fiscal Cliffs
Abstract: Large pending fiscal policy changes, such as in the United States in 2012 or in Japan with consumption taxes, often generate considerable uncertainty. ?Fiscal cliff? episodes have several features: an announced possible future change, a skewed set of possible out-comes, the possibility that implementation may not actually occur, and a known resolution date. This paper develops a model capturing these features and studies their impact. Fiscal cliff uncertainty shocks have immediate impact, with a magnitude that depends on the probability of implementation, which generates economic volatility. The possibility of fiscal cliffs lowers economic activity even in periods of relative certainty.
JEL Classification: E20; F60; F62;
https://doi.org/10.24148/wp2018-12
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Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2018-09-05
Number: 2018-12
Pages: 41 pages