Fiscal policy and learning

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Title: Fiscal policy and learning
ISBN: 978-952-462-788-7
Author: Mitra, Kaushik ; Evans, George W. ; Honkapohja, Seppo
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2012
Series number: 5/2012
Year of publication: 2012
Publication date: 26.1.2012
Published in: Published as Fiscal Policy Multipliers in an RBC Model with Learning, Macroeconomic Dynamics, 2017: Online First
Pages: 35 s.
Keywords: finanssipolitiikka; oppiminen; odotukset; verotus; mallit; suhdanteet; julkiset menot;
JEL: E62; D84; E21; E43
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

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