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Fiscal Policy Uncertainty and Investment
1 : Aix-Marseille University
Aix-Marseille University, Aix-Marseille School of Economics
2 : University of Lyon II and GATE
University of Lyon II
3 : Aix-Marseille University
Université de la Méditerranée - Aix-Marseille II
This paper investigates the effects of fiscal uncertainty on investment. We first document that private investment decreases in response to positive public spending uncertainty shocks in the Euro Area. The uncertainty shock is estimated by resorting to a stochastic volatility model. We then build a New-Keynesian model enlarged with financial frictions and imperfect substitutability between capital and sovereign bonds. We show that our model is able to replicate the drop in investment observed in the data, unlike a typical New-Keynesian model. We also highlight the key role of the monetary policy in our results.
