Fiscal austerity in ambiguous times by Axelle Ferriere and Anastasios G. Karantounias
By: Ferriere, Axelle
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Contributor(s): Karantounias, Anastasios G.
Material type: 
ArticlePublisher: 2019Subject(s): POLITICA FISCAL | GASTO PUBLICO | REDUCCION | PRESUPUESTOS | MODELOS ECONOMETRICOSOnline resources: Click here to access online
In:
American Economic Journal. Macroeconomics v. 11, n. 1, January 2019, p. 89-131Summary: This paper analyzes optimal fiscal policy with ambiguity aversion
and endogenous government spending. We show that without
ambiguity, optimal surplus-to-output ratios are acyclical and that
there is no rationale for either reduction or further accumulation
of public debt. In contrast, ambiguity about the cycle can generate optimally policies that resemble “austerity” measures. Optimal policy prescribes higher taxes in adverse times and front-loaded fiscal consolidations that lead to a balanced primary budget in the long run. This is the case when interest rates are sufficiently responsive to cyclical shocks, that is, when the intertemporal elasticity of substitution is sufficiently low.
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| OP 2137/2018/4 American Economic Journal : Macroeconomics | OP 2137/2018/4-1 Corporate income tax, legal form of organization and employment | OP 2137/2019/1 American Economic Journal : Macroeconomics | OP 2137/2019/1-1 Fiscal austerity in ambiguous times | OP 2137/2019/2 American Economic Journal : Macroeconomics | OP 2137/2019/3 American Economic Journal : Macroeconomics | OP 2137/2019/3-1 Is Government spending at the zero lower bound desirable ? |
Resumen.
Bibliografía.
This paper analyzes optimal fiscal policy with ambiguity aversion
and endogenous government spending. We show that without
ambiguity, optimal surplus-to-output ratios are acyclical and that
there is no rationale for either reduction or further accumulation
of public debt. In contrast, ambiguity about the cycle can generate optimally policies that resemble “austerity” measures. Optimal policy prescribes higher taxes in adverse times and front-loaded fiscal consolidations that lead to a balanced primary budget in the long run. This is the case when interest rates are sufficiently responsive to cyclical shocks, that is, when the intertemporal elasticity of substitution is sufficiently low.
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