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Fiscal Foresight and Information Flows

Author/Editor: Leeper, Eric M. | Walker, Todd B. | Yang, Shu-Chun S.
Authorized for Distribution: June 1, 2012
Electronic Access: Free Full Text (PDF file size is 1,607KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: News - or foresight - about future economic fundamentals can create rational expectations equilibria with non-fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react. Using tax policies as a leading example of foresight, simple theory makes transparent the economic behavior and information structures that generate non-fundamental equilibria. Econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes; biases are quantitatively important when two canonical theoretical models are taken as data generating processes. Both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows. Different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non-uniqueness problem endemic to moving average representations.
 
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Series: Working Paper No. 12/153
Subject(s): Asset prices | Economic forecasting | Fiscal policy | Forecasting models | Tax policy
Author's keyword(s): News | anticipated taxes | non-fundamental representation | identified VARs
 
English  
    Published:   June 1, 2012        
            Format:   Paper
    Stock No:   WPIEA2012153   Pages:   64
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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