Fiscal policy multipliers in an RBC model with learning
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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, which is in sharp contrast to the implausibly low values under RE. Positive effects of fiscal policy are demonstrated during times of economic stress like the recent Great Recession. Finally it is shown how learning can lead to consumption and investment dynamics empirically documented during some episodes of “fiscal consolidations.”
Mitra , K , Evans , G W & Honkapohja , S 2016 , ' Fiscal policy multipliers in an RBC model with learning ' Macroeconomic Dynamics , vol Forthcoming .
Copyright © 2016, Cambridge University Press. This work is made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://www.cambridge.org/core/journals/macroeconomic-dynamics
This work was supported by ESRC Grant RES-062-23-2617 and National Science Foundation Grant no. SES-1025011
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