DP6216 Anticipated Fiscal Policy and Adaptive Learning

Author(s): George W. Evans, Seppo Honkapohja, Kaushik Mitra
Publication Date: March 2007
Keyword(s): expectations, Ramsey model, taxation
JEL(s): D84, E21, E43, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6216

We consider the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations. To model this we assume that agents combine limited structural knowledge with a standard adaptive learning rule. We analyze these issues using two well-known set-ups, an endowment economy and the Ramsey model. In our set-up there are important deviations from both rational expectations and purely adaptive learning. Our approach could be applied to many macroeconomic frameworks.