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Fiscal Foresight: Analytical Issues

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  • Todd B. Walker

    (Indiana University)

  • Shu-Chun Susan Yang

    (Academia Sinica)

  • Eric M. Leeper

    (Indiana University)

Abstract

Fiscal foresight---the phenomenon that legislative and implementation lags ensure that private agents know the tax rates they face in the future---is intrinsic to the tax policy process. Although acknowledged in empirical work, theoretical analysis of its implications is scant. This paper develops an analytical framework to study the econometric implications of fiscal foresight. A simple example shows that foresight produces equilibrium time series with a non-invertible moving average component, which misaligns the agents' and the econometrician's information sets in estimated VARs. Economically meaningful shocks to taxes, therefore, cannot be easily extracted from statistical innovations. Non-invertibility arises as a natural outgrowth of the fact that optimal decisions discount future tax obligations; non-invertibility, therefore, is likely to be endemic to the study of fiscal policy.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 786.

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Date of creation: 2008
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Handle: RePEc:red:sed008:786

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  1. Christopher L. House & Matthew D. Shapiro, 2004. "Phased-In Tax Cuts and Economic Activity," Macroeconomics 0404009, EconWPA.
  2. Mertens, Karel & Ravn, Morten O., 2008. "The Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks: Theory and Empirical Evidence," CEPR Discussion Papers 6673, C.E.P.R. Discussion Papers.
  3. Eric M. Leeper, 1989. "Policy rules, information and fiscal effects in a "Ricardian" model," International Finance Discussion Papers 360, Board of Governors of the Federal Reserve System (U.S.).
  4. Douglas G. Steigerwald & Charles Stuart, 1997. "Econometric Estimation Of Foresight: Tax Policy And Investment In The United States," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 32-40, February.
  5. Garcia-Mila, Teresa, 1989. "Some empirical evidence on government purchase multipliers," Economics Letters, Elsevier, vol. 31(4), pages 375-380, December.
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