Fiscal Policy and Learning
35 Pages Posted: 8 Dec 2017 Last revised: 18 Nov 2021
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Fiscal Policy and Learning
Fiscal Policy and Learning
Date Written: January 26, 2012
Abstract
Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature (in sharp contrast to the implausibly low values under RE). Effectiveness of fiscal policy is demonstrated during times of economic stress like the recent Great Recession. Finally it is shown how learning can lead to dynamics empirically documented during episodes of "fiscal consolidations." JEL classification: E62, D84, E21, E43 Key words: Government Purchases, Expectations, Output Multiplier, Fiscal Consolidation, Taxation
JEL Classification: E62, D84, E21, E43
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