Working Paper: NBER ID: w16363
Authors: Eric M. Leeper; Alexander W. Richter; Todd B. Walker
Abstract: Changes in fiscal policy typically entail two kinds of lags: the legislative lag--between when legislation is proposed and when it is signed into law--and the implementation lag--from when a new fiscal law is enacted and when it takes effect. These lags imply that substantial time evolves between when news arrives about fiscal changes and when the changes actually take place--time when households and firms can adjust their behavior. We identify two types of fiscal news--government spending and changes in tax policy--and map the news processes into standard DSGE models. We identify news concerning taxes through the municipal bond market. If asset markets are efficient, the yield spread between tax-exempt municipal bonds and treasuries should be a function of the news concerning changes in tax policy. We identify news concerning government spending through the Survey of Professional Forecasters. We conclude that news concerning fiscal variables is a time-varying process that can have important qualitative and quantitative effects.
Keywords: fiscal foresight; DSGE models; government spending; tax policy
JEL Codes: E62; H2; H5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal foresight (H68) | Agents' behavior (L85) |
| Anticipated higher future taxes (H29) | Consumption and savings behavior (E21) |
| Consumption and savings behavior (E21) | Changes in investment and labor supply dynamics (J29) |
| Degree of foresight (D84) | Responses of economic variables (E39) |
| High foresight periods (G17) | More pronounced economic adjustments (F32) |
| Low foresight periods (G17) | More muted responses (Y50) |