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Fiscal policy and learning

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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

Using 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 leaning can lead to dynamics empirically documented during episodes of "fiscal consolidations".

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1205.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 5/2012.

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Length: 33 pages
Date of creation: 27 Jan 2012
Date of revision:
Handle: RePEc:hhs:bofrdp:2012_005

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: government purchases; expectations; output multiplier; fiscal consolidation; taxation;

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References

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  1. Eusepi, Stefano & Preston, Bruce, 2007. "Central bank communication and expectations stabilization," Proceedings, Federal Reserve Bank of San Francisco, issue March, pages 1-43.
  2. John Y. Campbell, 1992. "Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model," NBER Working Papers 4188, National Bureau of Economic Research, Inc.
  3. G�nter Coenen & Christopher J. Erceg & Charles Freedman & Davide Furceri & Michael Kumhof & Ren� Lalonde & Douglas Laxton & Jesper Lind� & Annabelle Mourougane & Dirk Muir & Susanna Mursula & Ca, 2012. "Effects of Fiscal Stimulus in Structural Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 22-68, January.
  4. Eva Carceles Poveda & Chryssi Giannitsarou, 2006. "Asset pricing with adaptive learning," Computing in Economics and Finance 2006 25, Society for Computational Economics.
  5. Giannitsarou, Chryssi, 2006. "Supply-side reforms and learning dynamics," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 291-309, March.
  6. Stefano Eusepi & Bruce Preston, 2008. "Expectations, Learning and Business Cycle Fluctuations," NBER Working Papers 14181, National Bureau of Economic Research, Inc.
  7. Heijdra, Ben J., 2009. "Foundations of Modern Macroeconomics," OUP Catalogue, Oxford University Press, edition 2, number 9780199210695.
  8. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
  9. Eric M. Leeper & Nora Traum & Todd B. Walker, 2011. "Clearing Up the Fiscal Multiplier Morass," NBER Working Papers 17444, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Hollmayr, Josef & Matthes, Christian, 2013. "Learning about fiscal policy and the effects of policy uncertainty," Discussion Papers 51/2013, Deutsche Bundesbank, Research Centre.
  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.

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