Policy Risk and the Business Cycle

By Benjamin Born, Johannes Pfeifer. Social Science Research Network, 2014

112 citations recorded by the source corpus.

The argument that policy risk, i.e., uncertainty about monetary and fiscal policy, has been holding back the economic recovery in the U.S. during the Great Recession has a large popular appeal. We analyze the role of policy risk in explaining business cycle fluctuations by using an estimated New Keynesian model featuring policy risk as well as uncertainty about technology. We directly measure uncertainty from aggregate time series and find considerable evidence of time-varying policy risk in the data. However, the “pure uncertainty”-effect of policy risk is unlikely to play a major role in business cycle fluctuations. In the estimated model, output effects are relatively small because the aggregate policy risk shocks are i) too small and ii) not sufficiently amplified.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/7bafd9e2685778bb8318b8c22fc183a38eac1b27

Citations in the corpus

• Uncertain Fiscal Consolidations (2013, unknown): “(2011) and Born and Pfeifer (2011) consider fiscal policy uncertainty in the form of time-varying shock variances in fiscal policy rules.”
• Policy uncertainty and aggregate fluctuations (2018, unknown): “On the macro side, FernÆndez-Villaverde, Guerr(cid:243)n-Quintana, Kuester and Rubio-Ram(cid:237)rez (2015) and Born and Pfeifer (2014) use estimated volatility of government spending and tax policy shocks in calibrated general equilibrium models of the U.S. economy to study the real e⁄ects of…”