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Future Fiscal and Budgetary Shocks

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  • Hian Teck Hoon

    (SMU)

  • Edmund S. Phelps

Abstract

We study the effects of future tax and budgetary shocks in a non-monetary and possibly non-Ricardian economy. An (unanticipated) temporary labor tax cut to be effective on a given future datea delayed debt bombcauses at once a drop in the (unit) value placed on the firms business asset, the customer, with the result that share prices, the hourly wage, and employment drop in tandem. This paradox of reduced activity through announcement of future stimulus does not hinge on an upward jump of long interest rates. A future tax-rate cut lacking a sunset provision has the same negative effects.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22438.

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Date of creation: Jan 2007
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Handle: RePEc:eab:macroe:22438

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Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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Keywords: Future shocks; business assets; Employment;

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References

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  1. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 949-963, August.
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  3. Hian Teck Hoon & Edmund S Phelps, 2004. "Future Fiscal and Budgetary Shocks," Working Papers, Singapore Management University, School of Economics 20-2004, Singapore Management University, School of Economics.
  4. Søren Nielsen, 1994. "Social security and foreign indebtedness in a small open economy," Open Economies Review, Springer, Springer, vol. 5(1), pages 47-63, March.
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  17. Phelps, Edmund S, 1992. "Consumer Demand and Equilibrium Unemployment in a Working Model of the Customer-Market Incentive-Wage Economy," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 1003-32, August.
  18. Barry, Frank & Devereux, Michael B., 2003. "Expansionary fiscal contraction: A theoretical exploration," Journal of Macroeconomics, Elsevier, Elsevier, vol. 25(1), pages 1-23, March.
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  21. Phelps, Edmund S. & Shell, Karl, 1969. "Public debt, taxation, and capital intensiveness," Journal of Economic Theory, Elsevier, Elsevier, vol. 1(3), pages 330-346, October.
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Cited by:
  1. Edmund S. Phelps, 2007. "Macroeconomics for a Modern Economy," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 543-561, June.
  2. Hoon, Hian Teck & Phelps, Edmund S., 2008. "Future fiscal and budgetary shocks," Journal of Economic Theory, Elsevier, Elsevier, vol. 143(1), pages 499-518, November.
  3. Petrucci, Alberto & Phelps, Edmund S., 2009. "Two-sector perspectives on the effects of payroll tax cuts and their financing," Journal of Public Economics, Elsevier, Elsevier, vol. 93(1-2), pages 176-190, February.

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