Fiscal Policy and Learning
AbstractUsing the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature (in sharp contrast to the implausibly low values under RE). Effectiveness of fiscal policy is demonstrated during times of economic stress like the recent Great Recession. Finally it is shown how learning can lead to dynamics empirically documented during episodes of 'fiscal consolidations.'
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Bibliographic InfoPaper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2012-10.
Date of creation: 2012
Date of revision:
Government Purchases; Expectations; Output Multiplier; Fiscal Consolidation; Taxation.;
Other versions of this item:
- Kaushik Mitra & George W. Evans & Seppo Honkapohja, 2012. "Fiscal Policy and Learning," CDMA Working Paper Series 201202, Centre for Dynamic Macroeconomic Analysis, revised 18 Jun 2013.
- Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2012. "Fiscal Policy and Learning," CEPR Discussion Papers 8891, C.E.P.R. Discussion Papers.
- Mitra, Kaushik & Evans, George W. & Honkapohja , Seppo, 2012. "Fiscal policy and learning," Research Discussion Papers 5/2012, Bank of Finland.
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
- NEP-DGE-2012-06-25 (Dynamic General Equilibrium)
- NEP-MAC-2012-06-25 (Macroeconomics)
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