Changes in fiscal policy typically entail two kinds of lags: the legislative lag-between when legislation is proposed and when it is signed into law-and the implementation lag-from when a new fiscal law is enacted and when it takes effect. These lags imply that substantial time evolves between when news arrives about fiscal changes and when the changes actually take place-time when households and firms can adjust their behavior. We identify two types of fiscal news-government spending and changes in tax policy-and map the news processes into standard DSGE models. We identify news concerning taxes through the municipal bond market. If asset markets are efficient, the yield spread between tax-exempt municipal bonds and treasuries should be a function of the news concerning changes in tax policy. We identify news concerning government spending through the Survey of Professional Forecasters. We conclude that news concerning fiscal variables is a time-varying process that can have important qualitative and quantitative effects.

This paper documents that a strong negative correlation between various measures of macroeconomic uncertainty and real GDP growth only emerged since the onset of the Great Recession. Before that event the correlation was weak and in many cases not statistically less than zero, even when restricting the data sample to only include recessions. A major difference between the Great Recession and previous recessions is that the Fed has been constrained by the ZLB on the federal funds rate. We contend that the ZLB constraint contributed to the stronger negative correlation that emerged in mid-2008. To test our theory, we use a model where the ZLB occasionally binds. The model has the same key feature as the data-away from the ZLB the correlation is weak but strongly negative when the policy rate is close to or at its ZLB. Our model is also consistent with the stronger correlations that emerged in the data between real GDP growth and both inflation and nominal interest rate uncertainty in mid-2008.

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When monetary policy faces a zero lower bound (ZLB) constraint on the nominal interest rate, a minimum state variable (MSV) solution may not exist even if the Taylor principle holds when the ZLB does not bind. This paper shows there is a clear tradeoff between the expected frequency and average duration of ZLB events along the boundary of the convergence region -the region of the parameter space where our policy function iteration algorithm converges to an MSV solution. We show this tradeoff with two alternative stochastic processes: one where monetary policy follows a 2-state Markov chain, which exogenously governs whether the ZLB binds, and the other where ZLB events are endogenous due to discount factor or technology shocks. We also show that small changes in the parameters of the stochastic processes cause meaningful differences in the decision rules and where the ZLB binds in the state space.