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Future Fiscal and Budgetary Shocks

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  • Hian Teck Hoon

    (SMU)

  • Edmund S. Phelps

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 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.

Suggested Citation

  • Hian Teck Hoon & Edmund S. Phelps, 2007. "Future Fiscal and Budgetary Shocks," Macroeconomics Working Papers 22438, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:macroe:22438
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    Cited by:

    1. Dennis Wesselbaum, 2019. "Expectation shocks and fiscal rules," International Economics and Economic Policy, Springer, vol. 16(2), pages 357-377, April.
    2. Edmund S. Phelps, 2008. "Macroeconomics for a Modern Economy," The American Economist, Sage Publications, vol. 52(1), pages 3-22, March.
    3. Hoon, Hian Teck & Phelps, Edmund S., 2008. "Future fiscal and budgetary shocks," Journal of Economic Theory, Elsevier, vol. 143(1), pages 499-518, November.
    4. Petrucci, Alberto & Phelps, Edmund S., 2009. "Two-sector perspectives on the effects of payroll tax cuts and their financing," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 176-190, February.
    5. Edmund S. Phelps, 2010. "Makroekonomia dla nowoczesnej gospodarki," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 79-109.

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    More about this item

    Keywords

    Future shocks; business assets; Employment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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