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Policy Change and Learning in the RBC Model

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

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. Both permanent and temporary policy changes are analyzed. 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8892.

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Date of creation: Mar 2012
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Handle: RePEc:cpr:ceprdp:8892

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Keywords: Expectations; Government Spending; Permanent and Temporary Policy Change; Taxation;

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References

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Two papers on policy uncertainty and learning
    by Christian Zimmermann in NEP-DGE blog on 2011-08-27 11:10:04
  2. Policy change and learning in the RBC model
    by Christian Zimmermann in NEP-DGE blog on 2011-11-30 01:39:21
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Cited by:
  1. Emanuel Gasteiger & Shoujian Zhang, 2013. "Anticipation, Learning and Welfare: the Case of Distortionary Taxation," Discussion Paper Series, Department of Economics 201309, Department of Economics, University of St. Andrews.
  2. Kaushik Mitra & George W. Evans & Seppo Honkapohja, 2011. "Policy Change and Learning in the RBC Model," CDMA Working Paper Series 201111, Centre for Dynamic Macroeconomic Analysis.
  3. George W. Evans & Kaushik Mitra, 2012. "E-stability in the Stochastic Ramsey Model," CDMA Working Paper Series 201209, Centre for Dynamic Macroeconomic Analysis.

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