Foresight and Information Flows

Eric Leeper, Todd Walker and Shu-Chun Yang

No 16951, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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 tax information flows. Differential U.S. federal tax treatment of municipal and treasury bonds embeds news about future taxes in bond yield spreads. Including that measure of tax news in identified VARs produces substantially different inferences about the macroeconomic impacts of anticipated taxes.

JEL-codes: C5 E62 H30 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-cba
Note: EFG
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Citations: View citations in EconPapers (45)

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