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Fiscal Foresight and Information Flows

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  • Todd B. Walker
  • Eric M. Leeper
  • Shu-Chun S. Yang

Abstract

News - or foresight - about future economic fundamentals can create rational expectations equilibria with non-fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react. Using tax policies as a leading example of foresight, simple theory makes transparent the economic behavior and information structures that generate non-fundamental equilibria. Econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes; biases are quantitatively important when two canonical theoretical models are taken as data generating processes. Both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows. Different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non-uniqueness problem endemic to moving average representations.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/153.

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Length: 65
Date of creation: 01 Jun 2012
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Handle: RePEc:imf:imfwpa:12/153

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Keywords: Economic forecasting; Forecasting models; tax rates; tax changes; bonds; bond; fiscal policy; municipal bonds; government spending; municipal bond; tax policy; tax revenues; tax revenue; tax increase; fiscal variables; tax cuts; discounting; tax cut; present value; budget constraint; nominal interest rate; treasury bonds; tax change; bond spread; fiscal shocks; government revenue; municipal bond market; bond market; tax increases; tax reductions; bond yields; municipal bond yields; government spending shocks; tax reform; tax-exempt bond; international finance; bond spreads; local taxes; bond yield; stock prices; aggregate demand; municipal bond yield; budget balance; fiscal authority; fiscal policy rules; treasury bond; budget deficits; stock returns; increases in tax rates; fiscal sustainability; fiscal policies; budget deficit; stock market; fiscal shock; tax reduction; fiscal actions; fiscal decisions; tax base; fiscal stimulus; tax rate reduction; public finance; government budget; bond yield curve; government budget constraint; fiscal multipliers; bond traders; tax-exempt bonds; fiscal variable; bond index; market bond; fiscal rules; fiscal revolution; tax bases; asset markets; discounted present value; government expenditure; fiscal instruments; fiscal conditions; fiscal framework;

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  1. Nora Traum & Shu-Chun Yang, 2010. "When Does Government Debt Crowd Out Investment?," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2010-006, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
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