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Economics Seminar

Author:

• Jinhui Bai
  Washington State University

• Rüdiger Bachmann
  University of Notre Dame

• Minjoon Lee
  University of Michigan

• Fudong Zhang
  University of Michigan

This paper quantifies the welfare and distributional costs of fiscal uncertainty in a neoclassical stochastic growth model with incomplete markets, where households face uninsurable idiosyncratic risks in the processes of their labor income and their discount factor. Aggregate uncertainty arises from both productivity and fiscal spending shocks. Starting from an initial situation calibrated to U.S. wealth inequality, we eliminate fiscal spending shocks, while keeping the aggregate productivity process intact. We then conduct, in general equilibrium, comparisons along the transition path, and present the distributional consequences of the elimination of fiscal uncertainty across wealth, employment status, and preference dimensions.