REDISTRIBUTION AND FISCAL UNCERTAINTY SHOCKS

This article studies the impact of fiscal uncertainty shocks. In micro data, noncapital holders reduce consumption persistently in response to an increase in fiscal uncertainty whereas capital holders do not. Motivated by this evidence, I introduce limited capital market participation and show that...

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Bibliographic Details
Published in:International economic review (Philadelphia) 2020-08, Vol.61 (3), p.1073-1095
Main Author: Saijo, Hikaru
Format: Article
Language:English
Subjects:
Ambiguity
Capital markets
Consumption
Economic activity
Economic models
Economic theory
Family income
Macroeconomics
Redistribution
Scandals
School boards
Uncertainty
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Summary:This article studies the impact of fiscal uncertainty shocks. In micro data, noncapital holders reduce consumption persistently in response to an increase in fiscal uncertainty whereas capital holders do not. Motivated by this evidence, I introduce limited capital market participation and show that it magnifies the fall in economic activity due to a fiscal uncertainty shock and induces macroeconomic comovement. This is because the limited participation model captures individual uncertainty about redistribution. When agents are ambiguity averse, this uncertainty about redistribution has first-order effects. As a result, the model successfully matches the empirical responses of macro and household variables.
ISSN:0020-6598
1468-2354
DOI:10.1111/iere.12449