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Future Fiscal and Budgetary Shocks

  • Hian Teck Hoon

    (SMU)

  • Edmund S. Phelps

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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File URL: http://www.eaber.org/node/22438
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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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  16. Hoon, Hian Teck & Phelps, Edmund S., 2008. "Future fiscal and budgetary shocks," Journal of Economic Theory, Elsevier, vol. 143(1), pages 499-518, November.
  17. Ascari, Guido & Rankin, Neil, 2004. "Perpetual youth and endogenous labour supply: a problem and a possible solution," Working Paper Series 0346, European Central Bank.
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  19. 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.
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