Fiscal Policy and Learning

35 Pages Posted: 8 Dec 2017 Last revised: 18 Nov 2021

See all articles by Kaushik Mitra

Kaushik Mitra

University of St. Andrews - School of Economics and Finance

George W. Evans

University of Oregon - Department of Economics; University of St. Andrews - School of Economics and Finance

Seppo Honkapohja

Centre for Economic Policy Research (CEPR); Aalto University School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Aalto University - School of Business

Multiple version iconThere are 3 versions of this paper

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

Suggested Citation

Mitra, Kaushik and Evans, George W. and Honkapohja, Seppo and Honkapohja, Seppo, Fiscal Policy and Learning (January 26, 2012). Bank of Finland Research Discussion Paper No. 5/2012, Available at SSRN: https://ssrn.com/abstract=3083987

Kaushik Mitra (Contact Author)

University of St. Andrews - School of Economics and Finance ( email )

Castlecliffe
Saint Andrews, Fife KY16 9SS
United Kingdom

George W. Evans

University of Oregon - Department of Economics ( email )

1285 University of Oregon
Eugene, OR 97403
United States
541-346-4662 (Phone)
541-346-1243 (Fax)

University of St. Andrews - School of Economics and Finance ( email )

The Scores, Castlecliff
St. Andrews, Fife KY16 8RD
United Kingdom
44-1334-462435 (Phone)

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.g.evans.shtml

Seppo Honkapohja

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aalto University School of Business ( email )

, PO Box 21210
Aalto FI-00076
Finland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Aalto University - School of Business

Finland

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