Fiscal Foresight and Information Flows
Eric M. Leeper
Indiana University at Bloomington - Department of Economics; National Bureau of Economic Research (NBER); Monash University, Department of Economics
Todd B. Walker
Indiana University Bloomington - Department of Economics
Shu-Chun S. Yang
IMF Working Paper No. 12/153
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.
Number of Pages in PDF File: 66
Keywords: News, Anticipated Taxes, Non-fundamental Representation, Identified Vars, Economic Forecasting, Forecasting Models, Econometric Modeling
JEL Classification: E62, H30working papers series
Date posted: August 9, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.375 seconds