NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Fiscal Foresight and Information Flows

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

NBER Working Paper No. 14630
Issued in January 2009
NBER Program(s):   EFG

Fiscal foresight -- the phenomenon that legislative and implementation lags ensure that private agents receive clear signals about the tax rates they face in the future -- is intrinsic to the tax policy process. This paper develops an analytical framework to study the econometric implications of fiscal foresight. Simple theoretical examples show that foresight produces equilibrium time series with nonfundamental representations, which misalign the agents' and the econometrician's information sets. Economically meaningful shocks to taxes, therefore, cannot generally be extracted from statistical innovations in conventional ways. Econometric analyses that fail to align agents' and the econometrician's information sets can produce distorted inferences about the effects of tax policies. The paper documents the sensitivity of econometric inferences of tax effects to details about how tax information flows into the economy. We show that alternative assumptions about the information flows that give rise to fiscal foresight can reconcile the diverse empirical findings in the literature on anticipated tax changes.

download in pdf format
   (541 K)

email paper

This paper is available as PDF (541 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: Eric M. Leeper & Todd B. Walker & Shu‐Chun Susan Yang, 2013. "Fiscal Foresight and Information Flows," Econometrica, Econometric Society, vol. 81(3), pages 1115-1145, 05.

Users who downloaded this paper also downloaded these:
Leeper, Walker, and Yang w14028 Fiscal Foresight: Analytics and Econometrics
Leeper, Richter, and Walker w16363 Quantitative Effects of Fiscal Foresight
Leeper, Walker, and Yang w15153 Government Investment and Fiscal Stimulus in the Short and Long Runs
Schmitt-Grohe and Uribe w14215 What's News in Business Cycles
Mertens and Ravn w16289 Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us