Research Discussion Papers, Bank of Finland
No 22/2011:
Policy change and learning in the RBC model
Kaushik Mitra ()
, George W. Evans and Seppo Honkapohja ()
Abstract: What is the impact of surprise and anticipated policy
changes when agents form expectations using adaptive learning rather than
rational expectations? We examine this issue using the standard stochastic
real business cycle model with lump-sum taxes. Agents combine knowledge
about future policy with econometric forecasts of future wages and interest
rates. Both permanent and temporary policy changes are analyzed. Dynamics
under learning can have large impact effects and a gradual hump-shaped
response, and tend to be prominently characterized by oscillations not
present under rational expectations. These fluctuations reflect periods of
excessive optimism or pessimism, followed by subsequent corrections.
Keywords: taxation; government spending; expectations; permanent and temporary policy changes; (follow links to similar papers)
JEL-Codes: D84; E21; E43; E62; (follow links to similar papers)
62 pages, November 10, 2011
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Mitra, Kaushik, George W. Evans and Seppo Honkapohja, (2013), 'Policy change and learning in the RBC model', Journal of Economic Dynamics and Control, Vol. 37, October, No. 10, pages 1947-1971
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