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Fiscal Foresight and Information Flows

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  • Todd B. Walker
  • Eric M. Leeper
  • Susan S. Yang

Abstract

News - or foresight - about future economic fundamentals can create rational expectations equilibria with non-fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react. Using tax policies as a leading example of foresight, simple theory makes transparent the economic behavior and information structures that generate non-fundamental equilibria. Econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes; biases are quantitatively important when two canonical theoretical models are taken as data generating processes. Both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows. Different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non-uniqueness problem endemic to moving average representations.

Suggested Citation

  • Todd B. Walker & Eric M. Leeper & Susan S. Yang, 2012. "Fiscal Foresight and Information Flows," IMF Working Papers 12/153, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/153
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    More about this item

    Keywords

    Fiscal policy; news; anticipated taxes; non-fundamental representation; identified VARs; tax rates; tax changes; bonds; bond; Fiscal Policies and Behavior of Economic Agents: General; Econometric Modeling;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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