The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation

Associate Professor, School of Economic Sciences, Washington State University.

Prof. Bai's CV

This study explores the welfare and distributional effects of ?scal volatility using a neoclassical stochasticgrowth model with incomplete markets. In our model, households face uninsurable idiosyncratic risks in their labor income and discount factor processes, and we allow aggregate uncertainty to arise from both productivity and government purchases shocks. We calibrate our model to key features of the U.S. economy, before eliminating government purchases shocks. We then evaluate the distributional consequences of the elimination of ?scal volatility and find that, in our baseline case, welfare gains increase with private wealth holdings.