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Anticipation, learning and welfare: the case of distortionary taxation

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  • Gasteiger, Emanuel
  • Zhang, Shoujian

Abstract

We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We extend the existing framework by introducing distortionary taxes as well as elastic labor supply, which makes agents’ decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behavior that can be interpreted as self-fulfilling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of fiscal reforms.

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Bibliographic Info

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

Volume (Year): 39 (2014)
Issue (Month): C ()
Pages: 113-126

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Handle: RePEc:eee:dyncon:v:39:y:2014:i:c:p:113-126

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

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Keywords: Fiscal policy; Adaptive learning; Oscillations; Welfare;

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