Fiscal policies and asset prices

Published

Journal Article

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. © The Author 2012.

Full Text

Duke Authors

Cited Authors

  • Croce, MM; Kung, H; Nguyen, TT; Schmid, L

Published Date

  • September 1, 2012

Published In

Volume / Issue

  • 25 / 9

Start / End Page

  • 2635 - 2672

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhs060

Citation Source

  • Scopus