Policy change and learning in the RBC model

Kaushik Mitra, George W Evans, Seppo Honkapohja

    Research output: Contribution to journalArticlepeer-review

    22 Citations (Scopus)
    2 Downloads (Pure)

    Abstract

    What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Both permanent and temporary policy changes are analyzed. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.
    Original languageEnglish
    Pages (from-to)1947-1971
    Number of pages25
    JournalJournal of Economic Dynamics and Control
    Volume37
    Issue number10
    Early online date25 Aug 2012
    DOIs
    Publication statusPublished - Oct 2013

    Keywords

    • Taxation
    • Government spending
    • Expectations
    • Permanent Policy Changes

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