Anticipation, learning and welfare : the case of distortionary taxation
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We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We ex- tend the existing framework by introducing distortionary taxes as well as elastic labour supply, which makes agents' decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour that can be interpreted as self-ful lling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of fiscal reforms.
Gasteiger , E & Zhang , S 2013 ' Anticipation, learning and welfare : the case of distortionary taxation ' School of Economics & Finance Discussion Paper 1309 , no. 1309 , University of St Andrews .
Working or discussion paper
(c) The authors
Revise and resubmit in Journal of Economic Dynamics and Control
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