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Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty

Alan J. Auerbach, Kevin A. Hassett

NBER Working Paper No. 9132
Issued in August 2002
NBER Program(s):Economic Fluctuations and Growth, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w9132

Published: Auerbach, Alan J. & Hassett, Kevin, 2007. "Optimal long-run fiscal policy: Constraints, preferences and the resolution of uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1451-1472, May. citation courtesy of

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