Fiscal policy and learning

Kaushik Mitra, George Evans and Seppo Honkapohja

No 5/2012, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature (in sharp contrast to the implausibly low values under RE). Effectiveness of fiscal policy is demonstrated during times of economic stress like the recent Great Recession. Finally it is shown how learning can lead to dynamics empirically documented during episodes of "fiscal consolidations."

Keywords: Government Purchases; Expectations; Output Multiplier; Fiscal Consolidation; Taxation (search for similar items in EconPapers)
JEL-codes: D84 E21 E43 E62 (search for similar items in EconPapers)
Date: 2012
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Related works:
Working Paper: Fiscal Policy and Learning (2012)
Working Paper: Fiscal Policy and Learning (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2012_005

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