Date of this Version
Review of Financial Studies
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.
This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Financial Studies following peer review. The version of record is available online at: http://dx.doi.org/10.1093/rfs/hhs060.
Croce, M. M., Kung, H., Nguyen, T. T., & Schmid, L. (2012). Fiscal Policies and Asset Prices. Review of Financial Studies, 25 (9), 2635-2672. http://dx.doi.org/10.1093/rfs/hhs060
Date Posted: 27 November 2017
This document has been peer reviewed.