Working Paper: NBER ID: w9132
Authors: Alan J. Auerbach; Kevin Hassett
Abstract: We construct a computational dynamic stochastic overlapping generations general equilibrium model with uncertain lifetimes and explore the impact of policy stickiness (specifically, a major reform will preclude future reforms for a generation) on optimal long-run fiscal policy. Under such circumstances, entitlement reforms exhaust a valuable option to move in the future. We explore the conditions under which the gain to waiting is large enough to induce optimizing policymakers to delay reforming a suboptimal system. We also allow for the uncertainty to have ARCH characteristics and explore the impact of time-varying uncertainty on the optimality of delayed policy action.
Keywords: No keywords provided
JEL Codes: E62; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy stickiness (C54) | long-run viability of fiscal policy (E62) |
| future uncertainty (D84) | current policy actions (E63) |
| positive shocks to life span (J17) | current capital accumulation (E22) |