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Learning about fiscal policy and the effects of policy uncertainty

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  • Josef Hollmayr
  • Christian Matthes

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 the 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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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-15.

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Date of creation: 2013
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Handle: RePEc:fip:fedrwp:13-15
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Find related papers by JEL classification:
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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Cited by:

  1. Hollmayr, Josef & Matthes, Christian, 2014. "Dynamics of Monetary-Fiscal Interaction under Learning," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100609, Verein für Socialpolitik / German Economic Association.
  2. Andrew Foerster & Troy Davig, 2015. "Uncertainty and Fiscal Cliffs," 2015 Meeting Papers 362, Society for Economic Dynamics.
  3. Hollmayr, Josef & Matthes, Christian, 2015. "Tales of transition paths: Policy uncertainty and random walks," Discussion Papers 14/2015, Deutsche Bundesbank, Research Centre.
  4. Hollmayr, Josef & Kühl, Michael, 2015. "Imperfect information about financial frictions and consequences for the business cycle," Discussion Papers 07/2015, Deutsche Bundesbank, Research Centre.
  5. Caprioli, Francesco, 2015. "Optimal fiscal policy under learning," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 101-124.

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