Uncovering the Effects of Government Spending through Tax Foresight
Published: 26 November 2024
Employing two different effective measures of future tax expectations in a local projection analysis on post-war U.S. data reveals that the effects of an anticipated government spending shock depend solely on expectations about future taxes. In contrast, tax foresight does not affect the transmission of unanticipated shocks. When agents expect taxes to rise (fall), the economy response to an anticipated government spending shock aligns with a monetary (fiscal) regime. Hence, tax foresight is a sufficient statistic to identify the effects of anticipated government spending shocks. We argue that this is consistent with recent literature on monetary and fiscal policy interaction.
Keywords: Monetary policy interactions; fiscal policy interactions; Government spending; Fiscal foresight;
JEL codes E52; E62; E63;
Working paper no. 821
821 - Uncovering the Effects of Government Spending through Tax Foresight
Research highlights
- According to theory, the effects of fiscal spending depend on whether agents anticipate the spending to be repaid.
- This paper employs two indirect measures of tax expectations and using local projections confirm the theory
- the effects of government spending shocks depend on expected taxes, provided the shock is anticipated by agents.
- When agents expect taxes to remain stable or decline, an anticipated increase in government spending generates a strong macroeconomic expansion
- the effect is muted or even contractionary if the shock occurs when taxes are predicted to rise.
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