Quantitative Effects of Fiscal Foresight
American Economic Journal: Economic Policy, Vol. 4, Issue 2, 2012
29 Pages Posted: 30 Jun 2015 Last revised: 1 Jul 2015
Date Written: October 11, 2011
Legislative and implementation lags imply that substantial time evolves between when news arrives about fiscal changes and when the changes actually take place -- time when households and firms can adjust their behavior. We identify two types of fiscal news -- government spending using the Survey of Professional Forecasters and taxes using the municipal bond market. The main contribution of the paper is a mapping from reduced-form estimates of news into a DSGE framework. We find that news about fiscal policy is a time-varying process and show that ignoring the time variation can have important consequences in a conventional macroeconomic model.
Keywords: News Shocks, Survey Data, DSGE
JEL Classification: E12, E62, H20, H30, H62
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