Do Positive Tax Revenue Shocks Impact Financial and Credit Conditions?

Abstract

This chapter examines whether positive tax revenue shocks impact credit and financial conditions. We find that fiscal policy shocks operate via the same channels as those of monetary policy. Tight tax shocks lead to tighter credit and financial conditions. However, evidence from the individual tax components shows that a positive shock to company income tax leads to looser credit conditions. This is in contrast to a positive shock to personal income tax, which leads to tighter credit conditions. This suggests that tax shocks impact companies and households differently. Furthermore, adverse tax shocks effects lower consumption expenditure and inflationary pressures. We conclude that fiscal and monetary policies interact via lowering consumer and business confidence, tight credit and financial conditions, and consumption channels to dampen inflationary pressures.