Fiscal sentiment and the weak recovery from the Great Recession: A quantitative exploration

Finn Kydland and Carlos Zarazaga

Journal of Monetary Economics, 2016, vol. 79, issue C, 109-125

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.

Keywords: US economy; Great Recession; Neoclassical growth model; Tax regime switch; Transitional dynamics (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Fiscal sentiment and the weak recovery from the Great Recession: a quantitative exploration (2013)
Working Paper: Fiscal Sentiment and the Weak Recovery from the Great Recession: A Quantitative Exploration (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:79:y:2016:i:c:p:109-125

DOI: 10.1016/j.jmoneco.2016.03.002

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