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Quantitative Effects of Fiscal Foresight

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  • Eric M. Leeper
  • Alexander W. Richter
  • Todd B. Walker

Abstract

Changes in fiscal policy typically entail two kinds of lags: the legislative lag—between when legislation is proposed and when it is signed into law—and the implementation lag—from when a new fiscal law is enacted and when it takes effect. These lags imply that substantial time evolves between when news arrives about fiscal changes and when the changes actually take place—time when households and firms can adjust their behavior. We identify two types of fiscal news—government spending and changes in tax policy—and map the news processes into standard DSGE models. We identify news concerning taxes through the municipal bond market. If asset markets are efficient, the yield spread between tax-exempt municipal bonds and treasuries should be a function of the news concerning changes in tax policy. We identify news concerning government spending through the Survey of Professional Forecasters. We conclude that news concerning fiscal variables is a time-varying process that can have important qualitative and quantitative effects.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16363.

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Date of creation: Sep 2010
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Publication status: published as Eric M. Leeper, Alexander W. Richter, Todd B. Walker. "Quantitative Effects of Fiscal Foresight," in Roger Gordon and Roberto Perotti, organizers, "Trans-Atlantic Public Economics Seminar (TAPES), Fiscal Policy" American Economic Journal: Economic Policy 4(2), May 2012 (American Economic Association) (2012)
Handle: RePEc:nbr:nberwo:16363

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  1. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2009. "Fiscal Foresight and Information Flows," NBER Working Papers 14630, National Bureau of Economic Research, Inc.
  2. Leeper, Eric M. & Walker, Todd B. & Yang, Shu-Chun S., 2010. "Government investment and fiscal stimulus," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1000-1012, November.
  3. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2011. "Foresight and Information Flows," NBER Working Papers 16951, National Bureau of Economic Research, Inc.
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Cited by:
  1. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2012. "Policy Change and Learning in the RBC Model," CEPR Discussion Papers 8892, C.E.P.R. Discussion Papers.
  2. Athanasios O. Tagkalakis, 2013. "The output effects of systematic and non-systematic fiscal policy changes in Greece," Economics Bulletin, AccessEcon, vol. 33(3), pages 1816-1831.
  3. Paul Beaudry & Franck Portier, 2013. "News Driven Business Cycles: Insights and Challenges," NBER Working Papers 19411, National Bureau of Economic Research, Inc.
  4. Virkola, Tuomo, 2014. "Exchange Rate Regime, Fiscal Foresight and the Effectiveness of Fiscal Policy in a Small Open Economy," ETLA Reports 20, The Research Institute of the Finnish Economy.
  5. Milan Deskar-Škrbić & Hrvoje Šimović & Tomislav Ćorić, 2013. "Effects of Fiscal Policy in a Small Open Economy: Evidence of Croatia," EFZG Working Papers Series 1302, Faculty of Economics and Business, University of Zagreb.
  6. Sandra Gomes & Nikolay Iskrev & Caterina Mendicino, 2013. "Monetary policy shocks: We got news!," Working Papers w201307, Banco de Portugal, Economics and Research Department.
  7. Ji, K., 2013. "Essays on tax policy, institutions, and output," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5928131, Tilburg University.
  8. Felix Reichling & Charles Whalen, 2012. "Assessing the Short-Term Effects on Output of Changes in Federal Fiscal Policies: Working Paper 2012-08," Working Papers 43278, Congressional Budget Office.

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