Fiscal Uncertainty in Habit-Forming and Lumpy Economies

Matteo Ghilardi and Roy Zilberman

No 431361324, Working Papers from Lancaster University Management School, Economics Department

Abstract: Deficit-financing pressures turn dividend taxation into fiscal risk embedded in equity valuations. A production-based general equilibrium model with internal consumption habits and partial investment irreversibility delivers: (i) investment responses counter to dividend tax changes via a habit-augmented stochastic discount factor; and (ii) lumpy investment dynamics: muted busts, amplified recoveries, and sizeable valuation fluctuations driven by irreversibility-tax interactions. A novel tradeoff emerges: higher equity price volatility coexists with higher welfare and improved debt-to-GDP stabilization, as sharper, lumpier investment rebounds raise average consumption net of habits and shorten low-consumption episodes. The model rationalizes investment lumpiness following the 2012 American Taxpayer Relief Act.

Keywords: partial irreversibility; habit formation; asset prices; deficit-financing dividend taxes; public debt (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-dge
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