Review of Financial Studies Vol. 25 No. 9 2012
Fiscal Policies and Asset Prices
Abstract
[The surge in public debt triggered by the financial crisis has raised uncertainty about future tax pressure and economic activity. We examine the asset pricing effects of fiscal policies in a production-based general equilibrium model in which taxation affects corporate decisions by: (1) distorting profits and investment; (2) reducing the cost of debt through a tax shield; and (3) depressing productivity growth. In settings with recursive preferences, these three tax-based channels generate sizable risk premia, making tax uncertainty a first-order concern. We document further that corporate tax smoothing can substantially alter the effects of public expenditure shocks.]
- Volume
- 25
- Issue
- 9
- Pages
- 2635-2672
- Sources
- bibtex:phds-export.bib