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Anticipated Fiscal Policy and Adaptive Learning

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  • Evans, G.W.
  • Honkapohja ,S.
  • Mitra, K.

Abstract

We consider the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations. To model this we assume that agents combine limited structural knowledge with a standard adaptive learning rule. We analyze these issues using two well-known set-ups, an endowment economy and the Ramsey model. In our set-up there are important deviations from both rational expectations and purely adaptive learning. Our approach could be applied to many macroeconomic frameworks.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0705.

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Length: 29
Date of creation: Feb 2007
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Handle: RePEc:cam:camdae:0705

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Keywords: Taxation; expectations; Ramsey model;

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References

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  1. Evans, George W. & Ramey, Garey, 1998. "Calculation, Adaptation And Rational Expectations," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 2(02), pages 156-182, June.
  2. Branch, William A. & Evans, George W., 2006. "A simple recursive forecasting model," Economics Letters, Elsevier, Elsevier, vol. 91(2), pages 158-166, May.
  3. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models," NBER Technical Working Papers 0005, National Bureau of Economic Research, Inc.
  4. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(7), pages 2065-2082, October.
  5. John C. Williams & Athanasios Orphanides, 2004. "The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning, and Expectations," Computing in Economics and Finance 2004, Society for Computational Economics 144, Society for Computational Economics.
  6. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
  7. Marcet, A. & Nicolini, J.P., 1997. "Recurrent Hyperinflations and Learning," Papers, Centro de Estudios Monetarios Y Financieros- 9721, Centro de Estudios Monetarios Y Financieros-.
  8. In-Koo Cho & Noah Williams & Thomas J. Sargent, 2002. "Escaping Nash Inflation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 1-40.
  9. Matthew D. Shapiro & Christopher L. House, 2006. "Phased-In Tax Cuts and Economic Activity," American Economic Review, American Economic Association, American Economic Association, vol. 96(5), pages 1835-1849, December.
  10. Evans, George W. & Honkapohja, Seppo, 2002. "Adaptive learning and monetary policy design," Research Discussion Papers, Bank of Finland 29/2002, Bank of Finland.
  11. Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany.
  12. Evans, Geroge W & Honkapohja, Seppo & Romer, Paul, 1998. "Growth Cycles," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 495-515, June.
  13. George W. Evans & Garey Ramey, 2001. ""Adaptive Expectations, Underparameterization and the Lucas Critique," University of Oregon Economics Department Working Papers, University of Oregon Economics Department 2001-8, University of Oregon Economics Department, revised 01 Dec 2004.
  14. Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
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  17. James Bullard & John Duffy, 1998. "Learning and excess volatility," Working Papers, Federal Reserve Bank of St. Louis 1998-016, Federal Reserve Bank of St. Louis.
  18. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 207-24, March.
  19. Sargent, Thomas J & Wallace, Neil, 1973. "Rational Expectations and the Dynamics of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 328-50, June.
  20. Evans, George W & Honkapohja, Seppo & Marimon, Ramon, 1996. "Convergence in Monetary Inflation Models with Heterogeneous Learning Rules," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1310, C.E.P.R. Discussion Papers.
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  23. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
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  26. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  27. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
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  30. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(3), pages 507-535, April.
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Citations

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Cited by:
  1. Liam Graham, 2011. "Learning, information and heterogeneity," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201113, Centre for Dynamic Macroeconomic Analysis.
  2. Emanuel Gasteiger & Shoujian Zhang, 2013. "Anticipation, Learning and Welfare: the Case of Distortionary Taxation," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201301, Centre for Dynamic Macroeconomic Analysis.
  3. Mitra , Kaushik & Evans , George W. & Honkapohja , Seppo, 2011. "Policy change and learning in the RBC model," Research Discussion Papers, Bank of Finland 22/2011, Bank of Finland.
  4. Liam Graham, 2011. "Individual rationality, model-consistent expectations and learning," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201112, Centre for Dynamic Macroeconomic Analysis.
  5. Evans, George W. & Guse, Eran & Honkapohja, Seppo, 2008. "Liquidity traps, learning and stagnation," European Economic Review, Elsevier, Elsevier, vol. 52(8), pages 1438-1463, November.
  6. Konstantinos Angelopoulos & Bernardo X. Fernandez & James Malley, 2010. "The distributional consequences of supply-side reforms in general equilibrium," Working Papers, Business School - Economics, University of Glasgow 2010_26, Business School - Economics, University of Glasgow, revised Jun 2012.
  7. Isabelle SALLE (GREThA, CNRS, UMR 5113) & Martin ZUMPE (GREThA, CNRS, UMR 5113) & Murat YILDIZOGLU (GREThA, CNRS, UMR 5113) & Marc-Alexandre SENEGAS (GREThA, CNRS, UMR 5113), 2012. "Modelling Social Learning in an Agent-Based New Keynesian Macroeconomic Model," Cahiers du GREThA, Groupe de Recherche en Economie Théorique et Appliquée 2012-20, Groupe de Recherche en Economie Théorique et Appliquée.
  8. Seppo Honkapohja & Arja H. Turunen-Red & Alan D. Woodland, 2011. "Growth, Expectations, and Tariffs," CESifo Working Paper Series 3435, CESifo Group Munich.
  9. George W. Evans, 2011. "Comment on "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing"," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 61-71 National Bureau of Economic Research, Inc.

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