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NEWS ABOUT TAXES AND EXPECTATIONS-DRIVEN BUSINESS CYCLES

  • Anca-Ioana Sirbu (a1)
Abstract

This paper analyzes the possibility of expectations-driven business cycles to emerge in a one-sector real business cycle model if the unique driving force is news about future income tax rates. We find that good news about labor income tax rates cannot generate expectations-driven business cycles, whereas good news about capital income tax rates can. We show that a one-sector real business cycle model enriched with (i) variable capital utilization and (ii) investment adjustment costs and driven solely by news shocks about capital income tax rates is able to generate qualitatively and quantitatively realistic business cycle fluctuations. In contrast to numerous studies in the news-driven business cycle literature, our model maintains separable preferences.

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Corresponding author
Address correspondence to: Anca-Ioana Sirbu, Department of Economics, Western Washington University, Bellingham, WA 98225, USA; e-mail: anca.sirbu@wwu.edu.
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I am grateful to Jang-Ting Guo for very helpful advice and continuous support throughout this project and to Richard Arnott for insightful comments. I would also like to thank Richard Suen, two anonymous referees, and seminar and conference participants at U.C. Riverside, the 20th Annual Symposium of the Society for Nonlinear Dynamics and Econometrics, 81st Annual Meetings of the Southern Economic Association, 18th International Conference on Computing in Economics and Finance, Spring 2013 Midwest Macro Meetings, 2013 Annual Conference of the Association for Public Economic Theory, and the 2013 Annual Conference of the Society for Advancement in Economic Theory for helpful suggestions and comments. Of course, all remaining errors are my own.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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