Fiscal Foresight and Information Flows

Todd Walker, Eric Leeper and Susan Yang

No 2012/153, IMF Working Papers from International Monetary Fund

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 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.

Keywords: WP; tax rate; news; anticipated taxes; non-fundamental representation; identified VARs; income tax; impulse response function; equilibrium process; government spending; tax shock; capital taxes following; information process III; at par; Municipal bonds; Vector autoregression; Labor taxes; Tax law (search for similar items in EconPapers)
Pages: 65
Date: 2012-06-01
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Fiscal Foresight and Information Flows (2013)
Working Paper: FISCAL FORESIGHT AND INFORMATION FLOWS (2009)
Working Paper: Fiscal Foresight and Information Flows (2009)
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