Fiscal Sentiment and the Weak Recovery from the Great Recession: A Quantitative Exploration

It seems reasonable to speculate that, in light of those fiscal realities, households and businesses started to make their decisions in the wake of the Great Recession as if convinced that a switch to a higher taxes regime would soon happen. After all, the unprecedented measures implemented during and after the 2008–09 crisis may have appeared to be part of fiscal and monetary policy regimes substantially different from those of the past.

Our research examines the quantitative relevance of this conjecture, referred to hereafter as the “fiscal sentiment” hypothesis, which contrasts with the view of interpretations that slow recovery reflected sudden and outof-the-blue “gloomy consumer sentiment.” Concretely, we ask what economic outcomes should have been observed in the early years of the recovery from the Great Recession, specifically over the period 2009–2013, if economic agents had been making their consumption, employment, and investment decisions at that point with the belief that a switch to higher taxes was imminent. The comparison of those predictions with the evidence can help assess the quantitative plausibility of the fiscal sentiment hypothesis.

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