Fiscal Policy in the US: A New Measure of Uncertainty and Its Recent Development

Abstract

We use the dispersion of the Federal Budget Balance forecasts from Consensus Economics to produce a new measure of fiscal uncertainty; constant horizon forecasts are obtained through mixture distributions. The scheme we propose has several advantages over previous uncertainty measures. First (as opposed to recent proposals) it results in a forward-looking measure, which implies that any sudden development in (un)expected fiscal stance is immediately incorporated in the series. Second, the measure is by construction a real-time one. Third, being completely model-free it is not contaminated (inflated) by model uncertainty. Fourth, it is comprehensive in accounting both for the critical welfare component of public expenditures and for taxes, i.e. it does not simply track uncertainty stemming from public consumption and investment. Fifth, as opposed to uncertainty indexes which can be interpreted only dynamically, our measure has an obvious intuitive point-wise interpretation. Interestingly, the inception of the Trump administration has led to unprecedented uncertainty shocks which are shown to have put a non-negligible brake on the US slow recovery. On a more general level, we show that fiscal uncertainty shocks have clear recessionary effects. Furthermore, constraints on monetary policies during the ZLB have likely caused the recessionary effects of fiscal uncertainty shocks to be stronger.