Learning About Fiscal Policy and the Effects of Policy Uncertainty

39 Pages Posted: 4 Oct 2013

See all articles by Josef Hollmayr

Josef Hollmayr

Goethe University Frankfurt

Christian Matthes

Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2013

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.

Keywords: DSGE, Fiscal Policy, Learning

JEL Classification: E32, D83, E62

Suggested Citation

Hollmayr, Josef and Matthes, Christian, Learning About Fiscal Policy and the Effects of Policy Uncertainty (September 30, 2013). FRB Richmond Working Paper No. 13-15. Available at SSRN: https://ssrn.com/abstract=2335579 or http://dx.doi.org/10.2139/ssrn.2335579

Josef Hollmayr

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Christian Matthes (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
27
Abstract Views
339
PlumX Metrics