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Learning about fiscal policy and the effects of policy uncertainty

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Listed author(s):
  • 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
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. Richter, Alexander W. & Throckmorton, Nathaniel A., 2015. "The consequences of an unknown debt target," European Economic Review, Elsevier, vol. 78(C), pages 76-96.
  2. Hollmayr, Josef & Matthes, Christian, 2015. "Tales of transition paths: Policy uncertainty and random walks," Discussion Papers 14/2015, Deutsche Bundesbank, Research Centre.
  3. Andrew Foerster & Troy Davig, 2014. "Uncertainty and Fiscal Cliffs," 2014 Meeting Papers 717, Society for Economic Dynamics.
  4. Caprioli, Francesco, 2015. "Optimal fiscal policy under learning," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 101-124.
  5. Hollmayr, Josef & Kühl, Michael, 2016. "Learning about banks' net worth and the slow recovery after the financial crisis," Discussion Papers 39/2016, Deutsche Bundesbank, Research Centre.
  6. Josef Hollmayr & Michael Kuehl, 2016. "Imperfect Information about Financial Frictions and Consequences for the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 179-207, October.
  7. 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.

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