Publication Type

Journal Article

Publication Date

11-2008

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 date—a delayed “debt bomb”—causes 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.

Keywords

Future shocks; Business assets; Employment.

Discipline

Econometrics | Finance

Research Areas

Applied Microeconomics

Publication

Journal of Economic Theory

Volume

143

First Page

499

Last Page

518

ISSN

0022-0531

Identifier

10.1016/j.jet.2006.12.008

Publisher

Elsevier

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://dx.doi.org/10.1016/j.jet.2006.12.008

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