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Fiscal sentiment and the weak recovery from the Great Recession: A quantitative exploration

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  • Kydland, Finn E.
  • Zarazaga, Carlos E.J.M.

Abstract

The US economy has not recovered from the Great Recession as strongly as predicted by the neoclassical growth model, even after incorporating a variety of frictions to it. The paper explores quantitatively the hypothesis that the counterfactual predictions are mostly the result of ignoring the expectations of higher taxes prompted by unprecedented fiscal challenges faced by that country in peacetime. The main finding is that this fiscal sentiment hypothesis can account for a substantial fraction of the decline in investment and labor input in the aftermath of the Great Recession, provided the perceived higher taxes fall almost exclusively on capital income.

Suggested Citation

  • Kydland, Finn E. & Zarazaga, Carlos E.J.M., 2016. "Fiscal sentiment and the weak recovery from the Great Recession: A quantitative exploration," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 109-125.
  • Handle: RePEc:eee:moneco:v:79:y:2016:i:c:p:109-125
    DOI: 10.1016/j.jmoneco.2016.03.002
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    Cited by:

    1. Hu, Ruiyang & Zarazaga, Carlos E., 2016. "Fiscal stabilization and the credibility of the U.S. budget sequestration spending austerity," Working Papers 1616, Federal Reserve Bank of Dallas.
    2. Carlos Zarazaga & Ruiyang Hu, 2017. "Fiscal Stabilization and the Credibility of the U.S. Budget Sequestration Spending Austerity," 2017 Meeting Papers 250, Society for Economic Dynamics.
    3. Zarazaga, Carlos E., 2013. "The prospect of higher taxes and weak job growth during the recovery from the great recession: macro versus micro Frisch elasticities," Working Papers 1302, Federal Reserve Bank of Dallas.
    4. Zarazaga, Carlos E., 2014. "Macroelasticities and the U.S. sequestration budget cuts," Working Papers 1412, Federal Reserve Bank of Dallas.
    5. Hansen, G.D. & Ohanian, L.E., 2016. "Neoclassical Models in Macroeconomics," Handbook of Macroeconomics, Elsevier.

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