Anticipation, learning and welfare : the case of distortionary taxation
Abstract
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.
Citation
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 .
ISSN
0962-4031Type
Working or discussion paper
Rights
(c) The authors
Description
Revise and resubmit in Journal of Economic Dynamics and ControlCollections
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