Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212201 
Year of Publication: 
2011
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 22/2011
Publisher: 
Bank of Finland, Helsinki
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.
Subjects: 
taxation
government spending
expectations
permanent and temporary policy changes
JEL: 
E62
D84
E21
E43
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-781-8
Document Type: 
Working Paper

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