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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.

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  • 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:

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    2. Ray C. Fair, 2018. "Explaining theSlowU.S.Recovery: 2010'2017," Cowles Foundation Discussion Papers 2124, Cowles Foundation for Research in Economics, Yale University.
    3. Troy Davig & Andrew Foerster, 2019. "Uncertainty and Fiscal Cliffs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(7), pages 1857-1887, October.
    4. Abakah, Emmanuel Joel Aikins & Caporale, Guglielmo Maria & Gil-Alana, Luis Alberiko, 2021. "Economic policy uncertainty: Persistence and cross-country linkages," Research in International Business and Finance, Elsevier, vol. 58(C).
    5. Hu, Ruiyang & Zarazaga, Carlos E., 2018. "Fiscal stabilization and the credibility of the U.S. budget sequestration spending austerity," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 54-66.
    6. Timothy Betts & Patrice M. Buzzanell, 2022. "Enacting Economic Resilience: A Synthesis of Economic and Communication Frameworks," JRFM, MDPI, vol. 15(4), pages 1-18, April.
    7. Carlos E. Zarazaga, 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.
    8. 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.
    9. Mikhail Mamonov & Anna Pestova, 2021. "Credit Supply Shocks and Household Defaults," CERGE-EI Working Papers wp691, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    10. Matthew Knowles, 2023. "Capital Deaccumulation and the Large Persistent Effects of Financial Crises," ECONtribute Discussion Papers Series 218, University of Bonn and University of Cologne, Germany.
    11. Rodrigo A. Cerda & José Tomás Valente, 2022. "The role of capital taxation on the business cycle: the case of Chile, 1960–2019," Economic Change and Restructuring, Springer, vol. 55(1), pages 83-108, February.
    12. Omar, Ayman M.A. & Lambe, Brendan J & Wisniewski, Tomasz Piotr, 2021. "Perceptions of the threat to national security and the stock market," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 504-522.
    13. Ray C. Fair, 2018. "Explaining the slow U.S. recovery: 2010–2017," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 53(4), pages 184-194, October.
    14. Lambe, Brendan & Li, Zhiyong & Qin, Weiping, 2022. "Uncertain times and the insider perspective," International Review of Financial Analysis, Elsevier, vol. 81(C).
    15. Carlos E. Zarazaga, 2014. "Macroelasticities and the U.S. sequestration budget cuts," Working Papers 1412, Federal Reserve Bank of Dallas.
    16. Hansen, G.D. & Ohanian, L.E., 2016. "Neoclassical Models in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2043-2130, Elsevier.

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