Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212272 
Year of Publication: 
2013
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 32/2013
Publisher: 
Bank of Finland, Helsinki
Abstract: 
How do cyclical fiscal stabilisation policies affect welfare and government bond risk premia? Using a new Keynesian model we find that the effects of fiscal policy rules on the bond premium and welfare crucially depend on the source of business cycle fluctuations. The overall effect is estimated using Bayesian methods and the mechanism is deconstructed by examining the propagation mechanism of the different shocks. We find that the impact of fiscal policy cyclicality on welfare and risk premia is highly non-linear and that these effects are of a policy relevant magnitude. Finally, we find that the welfare cost of highly procyclical fiscal policies are very large, but also excessive fiscal stabilization can generate non- negligible welfare losses.
Subjects: 
New Keynesian models
fiscal policy
bond risk premium
monetary policy
JEL: 
E5
E6
G1
Persistent Identifier of the first edition: 
ISBN: 
978-952-6699-54-7
Document Type: 
Working Paper

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