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Anticipation, Learning and Welfare: the Case of Distortionary Taxation

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  • Emanuel Gasteiger

    ()
    (Instituto Universitario de Lisboa)

  • Shoujian Zhang

    ()
    (University of St Andrews)

Abstract

We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We ex- tend the existing framework by introducing distortionary taxes as well as elastic labour supply, which makes agents' decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour that can be interpreted as self-ful lling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of fiscal reforms.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201301.

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Date of creation: 26 Aug 2013
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Handle: RePEc:san:cdmawp:1301

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Keywords: Fiscal Policy; Adaptive Learning; Oscillations;

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