NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Foresight and Information Flows

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

NBER Working Paper No. 16951
Issued in April 2011
NBER Program(s):   EFG

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 tax information flows. Differential U.S. federal tax treatment of municipal and treasury bonds embeds news about future taxes in bond yield spreads. Including that measure of tax news in identified VARs produces substantially different inferences about the macroeconomic impacts of anticipated taxes.

download in pdf format
   (459 K)

email paper

This paper is available as PDF (459 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16951

Users who downloaded this paper also downloaded these:
Lynch and Randall w16950 Why Surplus Consumption in the Habit Model May be Less Persistent than You Think
Ball and Mazumder w17044 Inflation Dynamics and the Great Recession
Leeper, Richter, and Walker w16363 Quantitative Effects of Fiscal Foresight
Leeper and Walker w16819 Fiscal Limits in Advanced Economies
Ramey w15464 Identifying Government Spending Shocks: It's All in the Timing
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

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

Contact Us