DP12384 The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation
This study explores the welfare and distributional effects of fiscal volatility using a neoclassical
stochastic growth 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 fiscal volatility
and find that, in our baseline case, welfare gains increase with private wealth holdings.