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Low-frequency fiscal uncertainty

Zhao Han ()

Journal of Monetary Economics, 2021, vol. 117, issue C, 639-657

Abstract: Long-run fiscal levels, or synonymously, fiscal targets, are usually assumed to be known to households inside the economy. This paper investigates the effects of unknown fiscal targets in an incomplete information, anticipated utility (IIAU) environment. Slowly increasing transfer payments cause households to suspect time-varying targets, and misperceptions impact both their expectation formation and decision making. Perceived targets enter the IIAU model as nonlinear state variables, introducing state-dependent fiscal multipliers. The short-run stimulus effects of Trump’s 2017 and Reagan’s 1981 Tax Cuts are comparable and modest. The long-run effects of Trump’s Tax Cuts worse off if transfers continue to increase.

Keywords: State-dependent fiscal policy; Incomplete information; Signal extraction; Expectation formation; Belief-driven fluctuations (search for similar items in EconPapers)
JEL-codes: C11 D83 E32 E62 H68 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jmoneco.2020.03.017

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