Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: May, 2013, Volume 81, Issue 3

Fiscal Foresight and Information Flows
p. 1115-1145

Eric M. Leeper, Todd B. Walker, Shu‐Chun Susan Yang

News—or foresight—about future economic fundamentals can create rational expectations equilibria with non‐fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react. Using tax policies as a leading example of foresight, simple theory makes transparent the economic behavior and information structures that generate non‐fundamental equilibria. Econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes; biases are quantitatively important when two canonical theoretical models are taken as data generating processes. Both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows. Different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non‐uniqueness problem endemic to moving average representations.

Log In To View Full Content

Supplemental Material

Supplement to "Fiscal Foresight and Information Flows"

This zip file contains the replication files for the manuscript.

Supplement to "Fiscal Foresight and Information Flows"

This appendix contains a thorough description of the model used in the paper.