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Policy change and learning in the RBC model

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Author Info

  • Mitra , Kaushik

    () (School of Economics & Finance, University of St Andrews)

  • Evans , George W.

    (University of Oregon and University of St Andrews)

  • Honkapohja , Seppo

    () (Bank of Finland)

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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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 22/2011.

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Length: 62 pages
Date of creation: 10 Nov 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_022

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: taxation; government spending; expectations; permanent and temporary policy changes;

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Citations

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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