Future Fiscal and Budgetary Shocks

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Author: 
Hian Teck Hoon
Edmund S. Phelps
Description: 
Paper No. 27-2007
JEL codes: 
Organisation: 
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.