Pfeifer, Johannes: Fiscal News, Uncertainty, and the Business Cycle. - Bonn, 2012. - Dissertation, Rheinische Friedrich-Wilhelms-Universität Bonn.
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author = {{Johannes Pfeifer}},
title = {Fiscal News, Uncertainty, and the Business Cycle},
school = {Rheinische Friedrich-Wilhelms-Universität Bonn},
year = 2012,
month = feb,

note = {The recent "Great Recession" has thrown macroeconomic research into a state of disarray and has clearly shown the need to go beyond traditional business cycle explanations. However, many of the recently proposed business cycle explanations rely on factors that are not directly observed by the econometrician. One promising way to deal with this issue of unobserved state variables has been the use of structural estimation. The present work contributes to the literature on non-traditional business cycle explanations by using structural macroeconomic modeling and structural estimation to analyze the role of fiscal news (Chapter 1), policy risk (Chapter 2), and terms of trade uncertainty (Chapter 3) for explaining macroeconomic fluctuations.
Chapter 1 investigates the role of news about fiscal policy, and in particular the anticipation of tax rate changes, for macroeconomic fluctuations in the United States. To deal with the problem that news shocks are not observed by the econometrician, we resort to structural estimation of a New Keynesian DSGE model. We find that while fiscal policy accounts for 12 to 20 percent of output variance at business cycle frequencies, the anticipated components hardly matter for explaining fluctuations of real variables. In contrast, anticipated capital tax shocks do explain a sizable part of inflation and nominal interest rate fluctuations, accounting for 5 to 15 percent of their total variance. Consistent with earlier studies, we find that news shocks account for 20 percent of output variance, driven by news about stationary TFP and non-stationary investment-specific technology.
Chapter 2 analyzes the role of policy risk in explaining business cycle fluctuations by using an estimated New Keynesian model featuring policy risk as well as uncertainty about technology. To deal with the unobserved state "uncertainty", we directly measure uncertainty from aggregate time series by structurally estimating a stochastic volatility model using Sequential Monte Carlo Methods. While we find considerable evidence of policy risk in the data, we show that the "pure uncertainty"-effect of policy risk is unlikely to play a major role in business cycle fluctuations. In the estimated model, output effects are relatively small due to i) dampening general equilibrium effects that imply a low amplification and ii) counteracting partial effects of uncertainty.
Chapter 3 analyzes the effects of terms of trade uncertainty on Chilean business cycles through the lens of a small open economy DSGE model. My findings are fourfold. First, there is considerable evidence for time-varying terms of trade uncertainty in the Chilean data, with the variance of terms of trade shocks more than doubling in a short period of time. Second, I show that the ex-ante and ex-post effects of increased terms of trade uncertainty can account for about one fifth of Chilean output fluctuations at business cycle frequencies. Third, I find that a two-standard deviation terms of trade risk shock, i.e. a 54 percent increase in uncertainty, leads to a 0.1 percent drop in output. The fact that terms of trade uncertainty more than doubled during the recent commodities boom suggests that the contribution of terms of trade risk during this more recent period may have been substantial. Finally, I show that the economic mechanisms that attenuated the negative output effects of uncertainty in Chapter 2 also dampen the negative impact of terms of trade uncertainty.},

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