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Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks

  • Karel Mertens
  • Morten O. Ravn

We provide evidence on the dynamic effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes. Preannounced but not yet implemented tax cuts give rise to contractions in output, investment, and hours worked while real wages increase. There are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary effects, on output, consumption, investment, hours worked, and real wages. Results are shown to be robust. Tax shocks are important impulses to the US business cycle and anticipation effects have been important during several business cycle episodes. (JEL E23, E32, E62, H20, H30)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.4.2.145
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File URL: http://www.aeaweb.org/aej/pol/data/2010-0152_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 2 (May)
Pages: 145-81

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Handle: RePEc:aea:aejpol:v:4:y:2012:i:2:p:145-81
Note: DOI: 10.1257/pol.4.2.145
Contact details of provider: Web page: https://www.aeaweb.org/aej-policy
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  1. Christopher L. House & Matthew D. Shapiro, 2004. "Phased-In Tax Cuts and Economic Activity," Macroeconomics 0404009, EconWPA.
  2. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," NBER Working Papers 14028, National Bureau of Economic Research, Inc.
  3. Karel Mertens & MortenO. Ravn, 2010. "Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach," Economic Journal, Royal Economic Society, vol. 120(544), pages 393-413, 05.
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  10. Morten O. Ravn & Karel Mertens, 2008. "The Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks: Theory and Empirical Evidence," 2008 Meeting Papers 575, Society for Economic Dynamics.
  11. Mertens, Karel & Ravn, Morten O, 2009. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks," CEPR Discussion Papers 7505, C.E.P.R. Discussion Papers.
  12. R. E. Hall, 1971. "The Dynamic Effects of Fiscal Policy in an Economy with Foresight," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 229-244.
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  16. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers 31, Society for Economic Dynamics.
  17. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.
  18. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
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  20. Karel Mertens & Morten Overgaard Ravn, 2010. "Online Appendix to "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks"," Technical Appendices 09-221, Review of Economic Dynamics.
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