Fiscal policy in uncertain times

Qu, Rui 2022. Fiscal policy in uncertain times. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

This thesis examines the effectiveness and design of fiscal policy in terms of rare disasters-induced uncertainty. Rare disasters, acting as adverse shocks, gener- ally depress the economy significantly. Simultaneously, the uncertainty caused by rare disasters may further exacerbate the negative effects of rare disasters. The fiscal stimulus package, the main tool for the government, can be adopted to combat rare disasters and recover the economy. However, a high degree of uncertainty induced by such a disaster might affect the efficacy of fiscal policy through the real allocation of resources. Especially how households respond to increases in government spending might become uncertain as their demand for private and public consumption shifts during rare disasters. This thesis takes the COVID-19 pandemic as an example to estimate the disaster-induced uncer- tainty and its effect on the effectiveness and optimisation of fiscal policy. A reformulated Smets-Wouters type new Keynesian model that includes govern- ment spending in households' utility is employed to find a larger uncertainty in household demand for private and public consumption that reduces the size of fiscal multipliers. Consequently, the fiscal policy package becomes less effective. Intuitively, the pandemic generates uncertainty in the degree of negative wealth effects that makes households cautious, resulting in lower private consumption and the fiscal multiplier. In such disaster-induced uncertainty, a greater fiscal stimulus is needed to maintain the same optimal welfare level as normal times. In particular, when the nominal interest rate is binding at zero, the optimal fis- cal stimulus is even larger. From the welfare perspective, the disaster-induced uncertainty itself reduces households' welfare. As a result, the fiscal stimulus package has the scope to combat rare disasters and help the economy recover, but policymakers need to take the disaster-induced uncertainty into account and significantly increase the size of the package.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General)
Uncontrolled Keywords:	fiscal policy; public consumption; government spending; uncertainty; rare disasters; fiscal multiplier; optimal policy; welfare;
Date of First Compliant Deposit:	7 July 2023
Last Modified:	07 Jul 2023 09:10
URI:	https://orca.cardiff.ac.uk/id/eprint/160843

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