Working Paper: CEPR ID: DP6216
Authors: George W. Evans; Seppo Honkapohja; Kaushik Mitra
Abstract: 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.
Keywords: Expectations; Ramsey Model; Taxation
JEL Codes: D84; E21; E43; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipated fiscal policy changes (E62) | immediate effects on interest rates (E43) |
| anticipated fiscal policy changes (E62) | immediate effects on consumption (E21) |
| future permanent increase in government spending (H59) | lower interest rates prior to the policy change (E43) |
| future permanent increase in government spending (H59) | higher interest rates after the policy change (E43) |
| policy change is temporary (D78) | interest rates initially drop (E43) |
| policy change is temporary (D78) | interest rates subsequently spike (E43) |
| agents' expectations of interest rates adjust over time (D84) | gradual convergence towards the rational expectations equilibrium (D84) |