Fiscal policy and learning

Kaushik Mitra, George W Evans, Seppo Honkapohja

    Research output: Working paper

    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."
    Original languageEnglish
    PublisherUniversity of St Andrews
    Number of pages32
    Publication statusPublished - Jan 2012

    Publication series

    NameCentre for Dynamic Macroeconomic Analysis, Working Paper 1202
    PublisherSchool of Economics and Finance, University of St Andrews

    Keywords

    • Government purchases
    • Expectations
    • Output multiplier
    • Fiscal consolidation
    • Taxation

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