Working Papers

2018-12 | September 2018

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Uncertainty and Fiscal Cliffs

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Large pending fiscal policy changes, such as in the United States in 2012 or in Japan with consumption taxes, often generate considerable uncertainty. “Fiscal cliff” episodes have several features: an announced possible future change, a skewed set of possible out-comes, the possibility that implementation may not actually occur, and a known resolution date. This paper develops a model capturing these features and studies their impact. Fiscal cliff uncertainty shocks have immediate impact, with a magnitude that depends on the probability of implementation, which generates economic volatility. The possibility of fiscal cliffs lowers economic activity even in periods of relative certainty.

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Article Citation

Davig, Troy, and Andrew Foerster. 2018. "Uncertainty and Fiscal Cliffs," Federal Reserve Bank of San Francisco Working Paper 2018-12. Available at https://doi.org/10.24148/wp2018-12