Fiscal Foresight and Information Flows

74 Pages Posted: 7 Feb 2009  

Eric M. Leeper

Indiana University at Bloomington - Department of Economics; National Bureau of Economic Research (NBER)

Todd B. Walker

Indiana University Bloomington - Department of Economics

Shu-Chun S. Yang

CAEPR

Multiple version iconThere are 3 versions of this paper

Date Written: January 21, 2009

Abstract

Fiscal foresight - the phenomenon that legislative and implementation lags ensure that private agents receive clear signals about the tax rates they face in the future - is intrinsic to the tax policy process. This paper develops an analytical framework to study the econometric implications of fiscal foresight. Simple theoretical examples show that foresight produces equilibrium time series with nonfundamental representations, which misalign the agents' and the econometrician's information sets. Economically meaningful shocks to taxes, therefore, cannot generally be extracted from statistical innovations in conventional ways. Econometric analyses that fail to align agents' and the econometrician's information sets can produce distorted inferences about the effects of tax policies. The paper documents the sensitivity of econometric inferences of tax effects to details about how tax information flows into the economy. We show that alternative assumptions about the information flows that give rise to fiscal foresight can reconcile the diverse empirical findings in the literature on anticipated tax changes.

Keywords: taxes, foresight, nonfundamental

JEL Classification: E62, C50

Suggested Citation

Leeper, Eric M. and Walker, Todd B. and Yang, Shu-Chun S., Fiscal Foresight and Information Flows (January 21, 2009). CAEPR Working Paper No. 2009-001. Available at SSRN: https://ssrn.com/abstract=1338784 or http://dx.doi.org/10.2139/ssrn.1338784

Eric Michael Leeper (Contact Author)

Indiana University at Bloomington - Department of Economics ( email )

304 Wylie Hall
Bloomington, IN 47405-6620
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812-855-9157 (Phone)
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Todd B. Walker

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Shu-Chun S. Yang

CAEPR ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

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