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Do US Government Tax Revenues and Expenditures Respond to Debt Levels and Economic Conditions Asymmetrically over the Business Cycle?

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  • Steven P Cassou
  • Hedieh Shadmani

Abstract

This paper empirically investigates whether there are asymmetries in the responses of US government tax revenue and expenditure to debt levels and economic conditions over the business cycle. State of the art regime switching regression models, including Threshold Regression and Markov Switching, are investigated. Both sides of the government budget show asymmetries, but the asymmetries for tax revenue show greater statistical significance. The results show that both tax revenue and expenditure respond to high debt levels, with the asymmetry in this response showing that fiscal authorities take weaker action in response to debt during poor economic times. In addition, the asymmetric response to economic conditions for both sides of the budget shows that stronger countercyclical policy is taken during poor economic times.

Suggested Citation

  • Steven P Cassou & Hedieh Shadmani, 2018. "Do US Government Tax Revenues and Expenditures Respond to Debt Levels and Economic Conditions Asymmetrically over the Business Cycle?," Applied Economics and Finance, Redfame publishing, vol. 5(3), pages 8-21, May.
    • Handle: RePEc:rfa:aefjnl:v:5:y:2018:i:3:p:8-21
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    References listed on IDEAS

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    3. Hakkio, Craig S & Rush, Mark, 1991. "Is the Budget Deficit "Too Large?"," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 429-445, July.
    4. Hansen Bruce E., 1997. "Inference in TAR Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(1), pages 1-16, April.
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    More about this item

    Keywords

    asymmetric fiscal policy; fiscal policy sustainability; cyclicality; government expenditure; tax revenue;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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