The paper studies the effects of fiscal policy uncertainty (FPU) on economic activity, with a focus on the US. We develop a new measure of uncertainty which is based on the dispersion of private-sector expectations regarding the (federal) deficit-GDP ratio. We quantify the effects of an exogenous uncertainty shock on industrial production, employment, and the price of financial assets, controlling for variables that could bias our estimates.
An exogenous increase in FPU induces a drop in stock prices and a contraction in economic activity. Those effects become less pronounced once we exclude the post-2009 period, thus corroborating the idea that central bank action is less effective at the zero lower bound. The historical decomposition suggests that the dramatic increase in FPU observed after the 2016 presidential elections lessened receded in the year following the elections by 0.3 and 0.6 percentage points in relation to the growth of employment and industrial production respectively.
Published in 2021 in: Empirical Economics, v. 61, 6, pp. 2613-2634
