Abstract

  
 

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Fiscal Policy and Learning


George W. Evans


University of Oregon - Department of Economics; University of Saint Andrews - School of Economics and Finance

Seppo Honkapohja


Bank of Finland; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Kaushik Mitra


University of Saint Andrews - School of Economics & Finance
March 2012

CEPR Discussion Paper No. DP8891

Abstract:     
What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Both permanent and temporary policy changes are analyzed. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.

Number of Pages in PDF File: 35

Keywords: Expectations, Government Spending, Permanent and temporary policy changes, Taxation

JEL Classification: D84, E21, E43, E62

working papers series


Date posted: April 4, 2012  

Suggested Citation

Evans, George W., Honkapohja, Seppo and Mitra, Kaushik, Fiscal Policy and Learning (March 2012). CEPR Discussion Paper No. DP8891. Available at SSRN: http://ssrn.com/abstract=2034109

Contact Information

George W. Evans (Contact Author)
University of Oregon - Department of Economics ( email )
1285 University of Oregon
Eugene, OR 97403
United States
541-346-4662 (Phone)
541-346-1243 (Fax)
University of Saint Andrews - School of Economics and Finance ( email )
The Scores, Castlecliff
St. Andrews, Fife KY16 8RD
United Kingdom
44-1334-462435 (Phone)
HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.g.evans.shtml
Seppo Honkapohja
Bank of Finland ( email )
P.O. Box 160
FIN-00101 Helsinki
Finland
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Poschinger Str. 5
Munich, DE-81679
Germany
HOME PAGE: http://www.CESifo.de
Kaushik Mitra
University of Saint Andrews - School of Economics & Finance ( email )
Castlecliffe
Saint Andrews, Fife KY16 9SS
United Kingdom
Feedback to SSRN (Beta)


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