Research Discussion Papers, Bank of Finland
No 5/2012:
Fiscal policy and learning
Kaushik Mitra ()
, George W. Evans and Seppo Honkapohja ()
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 leaning can lead to
dynamics empirically documented during episodes of "fiscal
consolidations".
Keywords: government purchases; expectations; output multiplier; fiscal consolidation; taxation; (follow links to similar papers)
JEL-Codes: D84; E21; E43; E62; (follow links to similar papers)
33 pages, January 27, 2012
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