Fiscal Foresight and Information Flows

By Todd B. Walker, Eric M. Leeper, Susan S. Yang

June 1, 2012

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Todd B. Walker, Eric M. Leeper, and Susan S. Yang Fiscal Foresight and Information Flows, (USA: International Monetary Fund, 2012) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Econometric analysis, Expenditure, Financial institutions, Fiscal policy, Labor taxes, Municipal bonds, Tax law, Tax policy, Taxes, Vector autoregression

Keywords: Anticipated taxes, At par, Capital taxes following, Equilibrium process, Government spending, Identified VARs, Impulse response function, Income tax, Information process III, Labor taxes, Municipal bonds, News, Non-fundamental representation, Tax law, Tax rate, Tax shock, Vector autoregression, WP

Publication Details

Pages:

65
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/153
Stock No:

WPIEA2012153
ISBN:

9781475504354
ISSN:

1018-5941

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