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Fiscal policy and learning

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MitraCDMAwp1202.pdf (439.9Kb)
Date
01/2012
Author
Mitra, Kaushik
Evans, George W
Honkapohja, Seppo
Funder
Economic & Social Research Council
Grant ID
RES-062-23-2617
Keywords
Government purchases
Expectations
Output multiplier
Fiscal consolidation
Taxation
HJ Public Finance
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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."
Citation
Mitra , K , Evans , G W & Honkapohja , S 2012 ' Fiscal policy and learning ' Centre for Dynamic Macroeconomic Analysis, Working Paper 1202 , University of St Andrews .
Type
Working or discussion paper
Rights
(c) 2012 the author
Collections
  • University of St Andrews Research
URL
http://ideas.repec.org/p/san/cdmawp/1202.html
URI
http://hdl.handle.net/10023/2260

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