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Quantitative Effects of Fiscal Foresight

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

Legislative and implementation 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 using the Survey of Professional Forecasters and taxes using the municipal bond market. The main contribution of the paper is a mapping from reduced-form estimates of news into a DSGE framework. We find that news about fiscal policy is a time-varying process and show that ignoring the time variation can have important consequences in a conventional macroeconomic model. (JEL E12, E62, H20, H30, H62)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.4.2.115
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File URL: http://www.aeaweb.org/aej/pol/data/2010-0174_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 2 (May)
Pages: 115-44

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Handle: RePEc:aea:aejpol:v:4:y:2012:i:2:p:115-44
Note: DOI: 10.1257/pol.4.2.115
Contact details of provider: Web page: https://www.aeaweb.org/aej-policy
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  1. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
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  8. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2011. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 1-29, 02.
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  13. Roberto perotti, 2011. "Expectations and Fiscal Policy: An Empirical Investigation," Working Papers 429, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  14. Mertens, Karel & Ravn, Morten O, 2009. "Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach," CEPR Discussion Papers 7423, C.E.P.R. Discussion Papers.
  15. 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.
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  17. Park, Sangkyun, 1997. "The Relationship Between Government Financial Condition and Expected Tax Rates Reflected in Municipal Bond Yields," National Tax Journal, National Tax Association, vol. 50(1), pages 23-38, March.
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  20. James M. Poterba, 1989. "Tax Reform and the Market For Tax-Exempt Debt," NBER Working Papers 2900, National Bureau of Economic Research, Inc.
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  22. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
  23. Kenneth L. Judd, 1983. "Short-Run Analysis of Fiscal Policy in a Simple Perfect Foresight Model," Discussion Papers 559, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  24. Peter Fortune, 1996. "Do municipal bond yields forecast tax policy?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 29-48.
  25. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
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  28. Lippi, Marco & Reichlin, Lucrezia, 1994. "VAR analysis, nonfundamental representations, blaschke matrices," Journal of Econometrics, Elsevier, vol. 63(1), pages 307-325, July.
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  31. Eric Leeper & Todd Walker, 2011. "Information Flows and News Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.
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