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Policy change and learning in the RBC model

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  • Mitra, Kaushik
  • Evans, George W.
  • Honkapohja, Seppo

Abstract

What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 10 ()
Pages: 1947-1971

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:10:p:1947-1971

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Taxation; Government spending; Expectations; Permanent policy changes;

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References

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Policy change and learning in the RBC model
    by Christian Zimmermann in NEP-DGE blog on 2011-11-30 01:39:21
  2. Two papers on policy uncertainty and learning
    by Christian Zimmermann in NEP-DGE blog on 2011-08-27 11:10:04
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Cited by:
  1. Emanuel Gasteiger & Shoujian Zhang, 2013. "Anticipation, Learning and Welfare: the Case of Distortionary Taxation," CDMA Working Paper Series 201301, Centre for Dynamic Macroeconomic Analysis.
  2. George W. Evans & Kaushik Mitra, 2012. "E-stability in the Stochastic Ramsey Model," CDMA Working Paper Series 201209, Centre for Dynamic Macroeconomic Analysis.
  3. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2012. "Policy Change and Learning in the RBC Model," CEPR Discussion Papers 8892, C.E.P.R. Discussion Papers.

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