Fiscal Foresight and Information Flows
AbstractFiscal foresight -- the phenomenon that legislative and implementation lags ensure that private agents receive clear signals about the tax rates they face in the future -- is intrinsic to the tax policy process. This paper develops an analytical framework to study the econometric implications of fiscal foresight. Simple theoretical examples show that foresight produces equilibrium time series with nonfundamental representations, which misalign the agents' and the econometrician's information sets. Economically meaningful shocks to taxes, therefore, cannot generally be extracted from statistical innovations in conventional ways. Econometric analyses that fail to align agents' and the econometrician's information sets can produce distorted inferences about the effects of tax policies. The paper documents the sensitivity of econometric inferences of tax effects to details about how tax information flows into the economy. We show that alternative assumptions about the information flows that give rise to fiscal foresight can reconcile the diverse empirical findings in the literature on anticipated tax changes.
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Bibliographic InfoArticle provided by Econometric Society in its journal Econometrica.
Volume (Year): 81 (2013)
Issue (Month): 3 (05)
Other versions of this item:
- Todd B. Walker & Eric M. Leeper & Shu-Chun S. Yang, 2012. "Fiscal Foresight and Information Flows," IMF Working Papers 12/153, International Monetary Fund.
- Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2009. "Fiscal Foresight and Information Flows," NBER Working Papers 14630, National Bureau of Economic Research, Inc.
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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- Nora Traum & Shu-Chun Yang, 2010.
"When Does Government Debt Crowd Out Investment?,"
Caepr Working Papers
2010-006, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
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