TY  - JOUR
AU  - Leeper,Eric M.
AU  - Walker,Todd B.
AU  - Yang,Shu-Chun Susan
TI  - Fiscal Foresight and Information Flows
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14630
PY  - 2009
Y2  - January 2009
UR  - http://www.nber.org/papers/w14630
L1  - http://www.nber.org/papers/w14630.pdf
N1  - Author contact info:
Eric M. Leeper
Department of Economics
304 Wylie Hall
Indiana University
Bloomington, IN  47405
Tel: 812/855-9157
Fax: NA
E-Mail: eleeper@indiana.edu

Todd B. Walker
Department of Economics
105 Wylie Hall
Indiana University
Bloomington, IN  47405
E-Mail: walkertb@indiana.edu

Shu-Chun Susan Yang
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431
Tel: 202-226-2762
E-Mail: ssyang@econ.sinica.edu.tw
AB  - 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.
ER  -