Research Discussion Papers, Bank of Finland
No 32/2013:
Welfare and bond pricing implications of fiscal stabilization policies
Kai Christoffel ()
, Ivan Jaccard ()
and Juha Kilponen ()
Abstract: How do cyclical fiscal stabilisation policies affect
welfare and government bond risk premia? Using a new Keynesian model we
find that the effects of fiscal policy rules on the bond premium and
welfare crucially depend on the source of business cycle fluctuations. The
overall effect is estimated using Bayesian methods and the mechanism is
deconstructed by examining the propagation mechanism of the different
shocks. We find that the impact of fiscal policy cyclicality on welfare and
risk premia is highly non-linear and that these effects are of a policy
relevant magnitude. Finally, we find that the welfare cost of highly
procyclical fiscal policies are very large, but also excessive fiscal
stabilization can generate non-negligible welfare losses.
Keywords: New Keynesian models; fiscal policy; bond risk premium; monetary policy; (follow links to similar papers)
JEL-Codes: E32; E52; E62; G12; (follow links to similar papers)
45 pages, December 11, 2013
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