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Policy Change and Learning in the RBC Model

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  • Kaushik Mitra
  • George W. Evans
  • Seppo Honkapohja

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 Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201111.

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Date of creation: 11 Aug 2011
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Handle: RePEc:san:cdmawp:1111

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Keywords: Taxation; Government Spending; Expectations; Permanent and temporary policy changes.;

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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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Cited by:
  1. Gasteiger, Emanuel & Zhang, Shoujian, 2011. "Anticipation, learning and welfare: the case of distortionary taxation," MPRA Paper 30625, University Library of Munich, Germany.
  2. Mitra, Kaushik & Evans, George W. & Honkapohja, Seppo, 2013. "Policy change and learning in the RBC model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(10), pages 1947-1971.
  3. George W. Evans & Kaushik Mitra, 2012. "E-stability in the Stochastic Ramsey Model," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201209, Centre for Dynamic Macroeconomic Analysis.

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