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Anticipation, Learning and Welfare: the Case of Distortionary Taxation

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  • Emanuel, Gasteiger
  • Shoujian, Zhang

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 labour supply, which makes agents. decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour 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 .scal reforms. (JEL: E32, E62, D84)

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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2013-50.

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Date of creation: 2013
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Handle: RePEc:edn:sirdps:477

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