Anticipation, learning and welfare: the case of distortionary taxation

Emanuel Gasteiger and Shoujian Zhang

Journal of Economic Dynamics and Control, 2014, vol. 39, issue C, 113-126

Abstract: We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We extend the existing framework by introducing distortionary taxes as well as elastic labor supply, which makes agents’ decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behavior that can be interpreted as self-fulfilling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of fiscal reforms.

Keywords: Fiscal policy; Adaptive learning; Oscillations; Welfare (search for similar items in EconPapers)
JEL-codes: D84 E32 E62 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Anticipation, Learning and Welfare: the Case of Distortionary Taxation (2013)
Working Paper: Anticipation, learning and welfare: the case of distortionary taxation (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:39:y:2014:i:c:p:113-126

DOI: 10.1016/j.jedc.2013.11.012

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