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Learning about fiscal policy and the effects of policy uncertainty

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  • Hollmayr, Josef
  • Matthes, Christian

Abstract

The recent crisis in the United States has often been associated with substantial amounts of policy uncertainty. In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model act as econometricians by estimating the policy rules for the different fiscal policy instruments, which include distortionary tax rates. Comparing the outcomes in our model to those under full-information rational expectations, we find that assuming that agents are not instantaneously aware of the new fiscal policy regime (or policy rule) in place leads to substantially more volatility in the short run and persistent differences in average outcomes. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 51/2013.

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Date of creation: 2013
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Handle: RePEc:zbw:bubdps:512013

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Keywords: DSGE; Fiscal Policy; Learning;

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  1. Kaushik Mitra & George W. Evans & Seppo Honkapohja, 2012. "Fiscal Policy and Learning," CDMA Working Paper Series 201202, Centre for Dynamic Macroeconomic Analysis, revised 18 Jun 2013.
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  8. Fabio Milani, 2005. "Expectations, Learning and Macroeconomic Persistence," Working Papers 050608, University of California-Irvine, Department of Economics.
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Cited by:
  1. Davig, Troy A. & Foerster, Andrew T., 2014. "Uncertainty and fiscal cliffs," Research Working Paper, Federal Reserve Bank of Kansas City RWP 14-4, Federal Reserve Bank of Kansas City.

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