“The recovery in the United States continues to be held back by a number of other headwinds, including…the restraining eﬀects of ﬁscal policy and ﬁscal uncertainty.”
—Ben S. Bernanke, Then-Chairman of the Federal Reserve, July 18, 2012
Over the past six years, policymakers and business leaders alike have seen the U.S. economy buffeted by larger-than-usual uncertainty about fiscal policy.
A new study investigates whether this increased uncertainty about fiscal policy has a detrimental impact on economic activity.
Some of the study’s key findings show:
- There is a considerable amount of time-varying volatility in the empirical behavior of taxes and government spending as a share of U.S. output.
- Fiscal uncertainty reduces economic activity. When uncertainty spikes, output, consumption, investment, and working hours all drop, staying low for several quarters.
- Increased uncertainty about the capital income tax rate lowers output.
- When the economy has very low nominal interest rates, as is currently the case for the U.S., the effects of fiscal uncertainty are amplified.
“Uncertainty played a significant role in the magnitude and persistence of the Great Recession,” write the study’s authors.
Read the study….