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Fiscal Sentiment and the Weak Recovery from the Great Recession: A Quantitative Exploration

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  • Carlos Zarazaga

    (Federal Reserve Bank of Dallas)

  • Finn Kydland

    (University of California, Santa Barbara)

Abstract

The U.S. economy isn't recovering from the deep Great Recession of 2008-2009 with the anticipated strength. A widespread conjecture is that this weakness can be traced to perceptions of an imminent switch to a higher taxes regime. The paper explores quantitatively this fiscal sentiment hypothesis. The main finding is that the hypothesis can account for a significant fraction of the decline in investment and labor input in the aftermath of the Great Recession, relative to their pre-recession trends. These results require, however, a qualification: The perceived higher taxes must fall almost exclusively on capital income.

Suggested Citation

  • Carlos Zarazaga & Finn Kydland, 2012. "Fiscal Sentiment and the Weak Recovery from the Great Recession: A Quantitative Exploration," 2012 Meeting Papers 1139, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:1139
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    References listed on IDEAS

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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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