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REDISTRIBUTION AND FISCAL UNCERTAINTY SHOCKS
Author(s) -
Saijo Hikaru
Publication year - 2020
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12449
Subject(s) - redistribution (election) , economics , ambiguity , shock (circulatory) , consumption (sociology) , monetary economics , ambiguity aversion , macroeconomics , macro , redistribution of income and wealth , econometrics , medicine , social science , philosophy , linguistics , sociology , politics , political science , computer science , law , unemployment , programming language
This article studies the impact of fiscal uncertainty shocks. In micro data, noncapital holders reduce consumption persistently in response to an increase in fiscal uncertainty whereas capital holders do not. Motivated by this evidence, I introduce limited capital market participation and show that it magnifies the fall in economic activity due to a fiscal uncertainty shock and induces macroeconomic comovement. This is because the limited participation model captures individual uncertainty about redistribution. When agents are ambiguity averse, this uncertainty about redistribution has first‐order effects. As a result, the model successfully matches the empirical responses of macro and household variables.