Future fiscal and budgetary shocks
Abstract
We study here the effects of future tax and budgetary shocks on present levels of economic activity and real interest rates in a nonmonetary and possibly non-Ricardian economy. The paper first takes up an (unanticipated) temporary tax cut to be effective on a given future date " a delayed "debt bomb." The sudden prospect of this future-dated shock causes at once a drop in the (unit) value placed on the firms business asset, the customer, and accordingly on the price of shares " with the result that the hourly wage, hours worked and GDP drop in tandem. This paradox of reduced activity through announcement of future "stimulus" does not hinge on an upward jump of long rates of interest, which may or may not occur: the short rate of return on shares is increased by the initial drop in their price, but the price has so much farther to fall that this is more than offset for a time by the expectation of ongoing capital loss, so short rates of interest actually drop. The paper next studies a future tax cut lacking a "sunset" provision and requiring instead a gradual welfare benefit adjustment to retain solvency. The same negative effects on present activity result. Third, the paper shows that if the tax cut is effective immediately, its effect is ambiguous, as the Marshallian supply-sider effect works the other way. Finally, the paper also examines the new anticipation of a future increase in the number of retirees in a pay-as-you-go social security program. In conclusion, juxtaposing these results against recent US experience, we hypothesize that the legislation of an unsustainable fiscal gap - the cuts in tax rates and the rise of future obligations owing to the cumulative deficit and the approaching bulge in retirement benefits - is an important cause of the decline in hours worked per employee and in the participation rates over the period.Download Info
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.Bibliographic Info
Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0405-01.Length: 53 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:clu:wpaper:0405-01
Contact details of provider:
Postal: 1022 International Affairs Building, 420 West 118th Street, New York, NY 10027
Phone: (212) 854-3680
Fax: (212) 854-8059
Web page: http://www.econ.columbia.edu/
More information through EDIRC
Related research
Keywords:Other versions of this item:
- Hoon, Hian Teck & Phelps, Edmund S., 2008. "Future fiscal and budgetary shocks," Journal of Economic Theory, Elsevier, vol. 143(1), pages 499-518, November.
- Hian Teck Hoon & Edmund S. Phelps, 2007. "Future Fiscal and Budgetary Shocks," Macroeconomics Working Papers 22438, East Asian Bureau of Economic Research.
- Hian Teck Hoon & Edmund S Phelps, 2004. "Future Fiscal and Budgetary Shocks," Working Papers 20-2004, Singapore Management University, School of Economics.
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
References
References listed on IDEASPlease report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Baxter, Marianne & King, Robert G, 1993.
"Fiscal Policy in General Equilibrium,"
American Economic Review,
American Economic Association, vol. 83(3), pages 315-34, June.
- King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
- Barro, Robert J, 1979.
"On the Determination of the Public Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 87(5), pages 940-71, October.
- Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
- Beaudry, Paul & Portier, Franck, 2003.
"Stock Prices, News and Economic Fluctuations,"
IDEI Working Papers
158, Institut d'Économie Industrielle (IDEI), Toulouse.
- Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
- Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Chapters, in: Enhancing Productivity (NBER-CEPR-TCER-Keio conference) National Bureau of Economic Research, Inc.
- Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
- Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," CEPR Discussion Papers 3844, C.E.P.R. Discussion Papers.
- Beaudry, Paul & Portier, Franck, 2006. "Stock Prices, News and Economic Fluctuations," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993.
"Optimal Fiscal Policy in a Business Cycle Model,"
NBER Working Papers
4490, National Bureau of Economic Research, Inc.
- Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August.
- V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report 160, Federal Reserve Bank of Minneapolis.
- Phelps, Edmund S. & Shell, Karl, 1969. "Public debt, taxation, and capital intensiveness," Journal of Economic Theory, Elsevier, vol. 1(3), pages 330-346, October.
- Martin Uribe & Stephanie Schmitt-Grohe, 2001.
"Optimal fiscal and monetary policy under sticky prices,"
Proceedings,
Federal Reserve Bank of San Francisco, issue Jun.
- Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under sticky prices," Journal of Economic Theory, Elsevier, vol. 114(2), pages 198-230, February.
- Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Optimal Fiscal and Monetary Policy Under Sticky Prices," NBER Working Papers 9220, National Bureau of Economic Research, Inc.
- Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," Departmental Working Papers 200105, Rutgers University, Department of Economics.
- Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," CEPR Discussion Papers 2942, C.E.P.R. Discussion Papers.
- Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
- Julio J. Rotemberg & Michael Woodford, 1989.
"Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity,"
NBER Working Papers
3206, National Bureau of Economic Research, Inc.
- Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
- Hian Teck Hoon & Edmund S. Phelps, 2007.
"Future Fiscal and Budgetary Shocks,"
Macroeconomics Working Papers
22438, East Asian Bureau of Economic Research.
- Hoon, Hian Teck & Phelps, Edmund S., 2008. "Future fiscal and budgetary shocks," Journal of Economic Theory, Elsevier, vol. 143(1), pages 499-518, November.
- Hian Teck Hoon & Edmund S Phelps, 2004. "Future Fiscal and Budgetary Shocks," Working Papers 20-2004, Singapore Management University, School of Economics.
- Hian Teck Hoon & Edmund S. Phelps, 2004. "Future fiscal and budgetary shocks," Discussion Papers 0405-01, Columbia University, Department of Economics.
- Guido Ascari & Neil Rankin, 2004.
"Perpetual youth and endogenous labour supply: a problem and a possible solution,"
Working Paper Series
346, European Central Bank.
- Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
- Barro, Robert J & King, Robert G, 1984.
"Time-separable Preferences and Intertemporal-Substitution Models of Business Cycles,"
The Quarterly Journal of Economics,
MIT Press, vol. 99(4), pages 817-39, November.
- Robert J. Barro & Robert G. King, 1985. "Time-Separable Preference and Intertemporal-Substitution Models of Business Cycles," NBER Working Papers 0888, National Bureau of Economic Research, Inc.
- Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 203-235, April.
- Barry, Frank & Devereux, Michael B., 2003. "Expansionary fiscal contraction: A theoretical exploration," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 1-23, March.
Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Hian Teck Hoon & Edmund S. Phelps, 2004.
"Future fiscal and budgetary shocks,"
Discussion Papers
0405-01, Columbia University, Department of Economics.
- Hoon, Hian Teck & Phelps, Edmund S., 2008. "Future fiscal and budgetary shocks," Journal of Economic Theory, Elsevier, vol. 143(1), pages 499-518, November.
- Hian Teck Hoon & Edmund S. Phelps, 2007. "Future Fiscal and Budgetary Shocks," Macroeconomics Working Papers 22438, East Asian Bureau of Economic Research.
- Hian Teck Hoon & Edmund S Phelps, 2004. "Future Fiscal and Budgetary Shocks," Working Papers 20-2004, Singapore Management University, School of Economics.
Lists
This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.Statistics
Access and download statisticsCorrections
When requesting a correction, please mention this item's handle: RePEc:clu:wpaper:0405-01For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Discussion Paper Coordinator).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.

