Fiscal Sentiment and the Weak Recovery from the Great Recession: A Quantitative Exploration

Carlos Zarazaga and Finn Kydland
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Carlos Zarazaga: Federal Reserve Bank of Dallas

No 1139, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: The U.S. economy isn't recovering from the deep Great Recession of 2008-2009 with the anticipated strength. A widespread conjecture is that this weakness can be traced to perceptions of an imminent switch to a higher taxes regime. The paper explores quantitatively this fiscal sentiment hypothesis. The main finding is that the hypothesis can account for a significant fraction of the decline in investment and labor input in the aftermath of the Great Recession, relative to their pre-recession trends. These results require, however, a qualification: The perceived higher taxes must fall almost exclusively on capital income.

Date: 2012
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Related works:
Journal Article: Fiscal sentiment and the weak recovery from the Great Recession: A quantitative exploration (2016)
Working Paper: Fiscal sentiment and the weak recovery from the Great Recession: a quantitative exploration (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:1139

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