Anticipation, Learning and Welfare: the Case of Distortionary Taxation

Emanuel Gasteiger and Zhang Shoujian

No 2013-50, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We extend the existing framework by introducing distortionary taxes as well as elastic labour supply, which makes agents. decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour that can be interpreted as self-fulfilling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of .scal reforms. (JEL: E32, E62, D84)

Date: 2013
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
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Journal Article: Anticipation, learning and welfare: the case of distortionary taxation (2014)
Working Paper: Anticipation, learning and welfare: the case of distortionary taxation (2011)
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