Supply-side reforms and learning dynamics Giannitsarou, Chryssi

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Giannitsarou, Chryssi
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Journal of Monetary Economics
Tax Law; Tax law -- Analysis; Corporate income taxes -- Analysis
Academic; Trade
To link to full-text access for this article, visit this link: Byline: Chryssi Giannitsarou Abstract: This paper studies the nature, the magnitude and the length of the transition after a capital tax cut. The transition is analysed with adaptive learning, under which agents do not need to adjust instantaneously to the change, as with rational expectations (RE). Impulse response analysis reveals that the transition with learning is asymmetrically sensitive to the nature of the exogenous technological shock at the time of the reform. If the reform coincides with a negative shock, the transition to the new steady state is slow, whereas, if it coincides with a positive shock, it is approximately the same as the one predicted by RE. The results imply that cutting capital income taxes before or during a recession may not be an effective means for short-run fiscal stimulus. Author Affiliation: Faculty of Economics, University of Cambridge, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 9DD, United Kingdom Article History: Received 16 July 2002; Revised 26 September 2004; Accepted 20 October 2004 Article Note: (footnote) [star] I am grateful to Andrew Scott and Albert Marcet for extensive discussions and feedback on this project. For comments and suggestions, I thank Seppo Honkapohja, Flavio Toxvaerd, John Driffill, Eva Carceles-Poveda, an anonymous referee, as well as seminar participants at London Business School, Universidade Nova de Lisboa, University of California Santa Barbara, Universitat Pompeu Fabra, Universite du Quebec a Montreal and University of Helsinki.
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