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Studies in Nonlinear Dynamics & Econometrics

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Volume 24 (2020)

Fiscal policy uncertainty and US output

Michal Ksawery Popiel
Published Online: 2019-11-23 | DOI: https://doi.org/10.1515/snde-2018-0024


The rise in US partisan conflict following the Great Recession led to a popular belief that uncertainty about fiscal policy was impeding output growth. I explore this hypothesis by nesting it in a standard structural vector autoregression (SVAR) model traditionally used for estimating fiscal multipliers. I augment the model with stochastic volatility (a measure of uncertainty) and allow that to interact with the endogenous variables. I consider various trend assumptions, subsamples and information sets and find that the evidence does not support this hypothesis. The results reveal that there is no systematic relationship between fiscal policy uncertainty and output. Moreover, a time-varying parameter version of the model shows that the lack of consistency across specifications is not driven by changes in the transmission of uncertainty shocks over time. Finally, I revisit Fernández-Villaverde, Guerrón-Quintana, Kuester, and Rubio-Ramírez (Fernández-Villaverde, J., P. Guerrón-Quintana, K. Kuester, and J. Rubio-Ramírez. 2015. “Fiscal Volatility Shocks and Economic Activity.” American Economic Review 105: 3352–3384) who find a significant negative relationship between fiscal policy uncertainty and output. I show that when their estimation is modified to incorporate the uncertainty around the estimate of uncertainty, their empirical result falls in line with the findings in this paper.

This article offers supplementary material which is provided at the end of the article.

Keywords: fiscal policy; stochastic volatility; time-varying parameters; uncertainty; vector autoregression


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About the article

Published Online: 2019-11-23

Conflict of interests: Michal Popiel is currently an Associate at Groupe d’analyse, Ltée. Research for this article was undertaken when he was a student at Queen’s University. The views presented in this article are those of the authors and do not reflect those of Groupe d’analyse, Ltée. Groupe d’analyse, Ltée provided no financial support for this article.

Citation Information: Studies in Nonlinear Dynamics & Econometrics, 20180024, ISSN (Online) 1558-3708, DOI: https://doi.org/10.1515/snde-2018-0024.

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